The Aggregate Demand Channel of Loan-to-Value Shocks

This paper explores the aggregate and distributional effects of loan-to-value (LTV) tightening using a Heterogeneous-Agent New Keynesian (HANK) model. Households in the model face income risk, housing decisions, and collateral constraints. The tightening of the LTV affects the economy through aggregate demand effects. General equilibrium channels amplify the impact of stricter LTV limits, disproportionately affecting borrowers with high LTV limits. Monetary policy accommodation mitigates these effects, reducing the costs of stricter LTV regulations.