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How Central Banks Use Macroprudential Policy to Cool Housing Markets
Description
Episode 67 of Monetary Policy Explained with Fexingo dives into macroprudential policy — the toolkit central banks use to prevent asset bubbles without raising interest rates for the whole economy. Lucas and Luna focus on a concrete example: New Zealand's 2021 loan-to-value ratio restrictions and debt-to-income caps, which cooled an overheated housing market while the Reserve Bank kept its cash rate low. They explain how tools like countercyclical capital buffers, loan-to-value limits, and stress tests target systemic risk in specific sectors. The hosts also discuss the trade-offs: macroprudential measures can be blunt, hard to calibrate, and may push risk into unregulated corners. A timely episode for anyone wondering why central banks sometimes use a scalpel instead of a sledgehammer.