A Structural Model of Macroprudential Policy: the Case of Ireland

The boom and bust that the Irish economy has endured in recent years is the prototypical example of how distortions in the banking sector amplify distortions in the real economy with calamitous effect. This paper shows how macroprudential policy can be used to dampen the interactions and spillovers between both sector We estimate a structural model of the Irish banking sector that incorporates a role for macroprudential policy. Specifically, we estimate supply and demand equations for different types of credit and show how macroprudential instruments can be used to target both credit demand and credit supply. We find evidence that variations in non-interest rate related credit conditions have a significant effect on credit demand in the Irish case. Our results show that macroprudential instruments that target the demand for credit such as loan-to-income (LTI) and loan-to-value (LTV) limits would have significantly dampened the growth in house prices in the Irish Case.