Both consumption and residential investment are affected by the collateral constraint. A tightening of the constraint induces debtors to shift consumption from current to future periods and to reduce residential investment by increasing shadow capital costs by . A high loan to value ratio reduces the impact of credit tightening on residential investment, since in this case an increase in the capital stock makes investment valuable for the household by increasing its borrowing capacity.
. A high loan to value ratio reduces the impact of credit tightening