Does an Unexpected Loosening in the Loan to Value Ratio Has Any Distributive Effects via the Inequality Channel?
Evidence indicates that an unexpected loosening in the loan to value ratio (LTV) shock reduces income inequality growth significantly. In addition, evidence from the counterfactual VAR approach analysis shows declining income inequality amplify the increase in house price growth, residential investment growth and credit growth due to LTV shocks. Since income inequality channel is a potent transmitter of loose LTV shocks to the real economic activity, hence policymakers should decisively eliminate the high levels of income inequality as these distort the transmission mechanism of macroprudential policies.
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