Pandemic Shocks and Macroprudential Policy

We introduce an extended borrower-saver DSGE model, where based on the Kaplan et al. (2020) classification of occupations, agents are split further into two subcategories, according to whether their occupation is directly ‘affected’ by a pandemic shock. We find that, contrary to the standard literature, during a pandemic shock an increase in the LTV ratio can increase social welfare and make all four agent types (borrowers affected, borrowers non-affected, savers affected, and savers non-affected) better off. Countercyclical optimal LTV rules are shown to increase social welfare, with savers gaining at the expense of borrowers, including those mostly affected by the pandemic. An optimal interest rate mortgage subsidy to those worst affected (‘affected’ mortgage borrowers), in coordination with stricter monetary and LTV policy, are shown to increase both social welfare and the welfare of borrowers and savers affected by the pandemic.