Template-Type: ReDIF-Paper 1.0 Author-Name: Dr. Indrani Manna Author-Name-First: Dr. Indrani Author-Name-Last: Manna Author-Email: Author-Workplace-Name: Director, Foreign Exchange Department of the Reserve Bank of India. Author-Name: Dr. Martin Suster Author-Name-First: Dr. Martin Author-Name-Last: Suster Author-Email: Author-Workplace-Name: Council Member, Council for Budget Responsibility, Bratislava, Slovakia. Author-Name: Dr.Biswajit Banerjee Author-Name-First: Dr.Biswajit Author-Name-Last: Banerjee Author-Email: biswajit.banerjee@ashoka.edu.in Author-Workplace-Name: Expert Policy Advisor to the Governor, National Bank of Slovakia; and Professor of Economics, Ashoka University Title: House Price Expectations, Household Indebtedness and Macroprudential Policy in a DSGE framework Abstract: By incorporating a data generating process for house price expectations in a standard new keynesian DSGE model, this paper differentiates between the macroeconomic impact of endogenous and exogenous sources of expectation shocks and the role of fiscal and macroprudential policy (in the absence of monetary policy) in managing these shocks in the housing market. The paper concludes that endogenous shocks pre-dominate exogenous shocks to expectations in home prices in accelerating credit growth and household indebtedness. But endogenous shocks can still be accredited with ’good housing booms’ tag as they raise the ability to pay-off rising debt significantly. In terms of policy, the paper finds that loan-to-value ratios score over payment to income ratios as a potent macroprudential instrument to manage housing market dynamics as constraint switching is limited in case of LTV because of an expectations sensitive factor market. Macroprudential instruments set as a function of household debt to GDP ratio reinforce the transmission channels and turn out to be counterproductive in case of endogenous shocks but effective in managing exogenous shocks. The paper also finds that property tax can be potential instrument to arrest rising home prices but it works effectively in coordination with other policies. We also show that endogenous refinancing decisions of households can be effectively used as a channel for transmission of monetary and macroprudential policy through timely coordination of two policies. length: 49 Creation-Date: 20221031 Revision-Date: Publication-Status: File-URL: https://dp.ashoka.edu.in/ash/wpaper/paper88_0.pdf File-Format: Application/pdf Number: 88 Keywords: Monetary policy Keywords: Expectations Keywords: Macroprudential Measures Keywords: Loan-tovalue Keywords: Payment-to-income Keywords: Housing tax Keywords: DSGE Handle: RePEc:ash:wpaper:88