Abstract: We develop an economic mechanism driving household debt expansion in a NK-DSGE model with heterogeneous households and capital adequacy constrained commercial banks. In addition, we also discuss the effectiveness of macro-prudential policy on the risk prevention of household debt. The main results of this paper are as follows. Firstly, driven by an expansion in household loan supply, the housing mortgage constraint mechanism has both static and dynamic multiplier effects on constrained household debt and house price, which reduces household consumption and raises household debt risk. Secondly, compared with the "capital adequacy ratio" tool, the counter-cyclical adjustment of "loan-to-value ratio" can weaken the static and dynamic multiplier effect of the housing mortgage restraint mechanism, effectively reduce the household debt risk. Thirdly, the marginal effect of macro-prudential policy decreases for larger tightening regulation. Moreover, when the proportion of constrained households or households’ leverage ratio is relatively higher, the tightening effect of macro-prudential policy is stronger.

Keywords: heterogeneous households; financial frictions; household debt risk; macro-prudential policy