Household Savings and Macroprudential Regulation

As a response to the global financial crisis many countries, including Denmark, have introduced macroprudential policies that regulate behavior in the mortgage market. The purpose of these regulations is to limit household indebtedness and to make the economy more resilient to financial shocks. However, it is not obvious that these policies increase macroeconomic stability in the presence of shocks different to what we experienced during the financial crisis. In a situation such as the current Covid-19 pandemic – a crisis that did not originate in financial markets – policies such as stricter amortization requirements reduce the households’ ability to smooth income shocks. These policies might thus lead to larger cuts in consumption and thus to less economic stability. In this project we aim to develop a new macroeconomic model informed by register data from Denmark to evaluate the consequences of macroprudential regulation and to help policy makers make better informed policy choices.