The macroeconomic effects of the LTV and LTI ratios in Ireland

We use the Central Bank of Ireland’s Dynamic Stochastic General Equilibrium model to investigate the introduction of regulatory loan-to-value and loan-to-income ratios in 2015, which form part of the Central Bank’s macroprudential measures. The main finding is that while the measures dampen economic activity in the short run, they bring benefits in the medium and long run. Household leverage declines, which lowers the default rate on bank loans. Households deleverage and foreign debt decreases significantly.