Working Paper: CEPR ID: DP12999
Authors: Alberto Martin; Enrique Moral-Benito; Tom Schmitz
Abstract: What are the effects of a housing bubble on the rest of the economy? We show that if firms and banksface collateral constraints, a housing bubble initially raises credit demand by housing firms while leavingcredit supply unaffected. It therefore crowds out credit to non-housing firms. If time passes and thebubble lasts, however, housing firms eventually pay back their higher loans. This leads to an increase inbanks’ net worth and thus to an expansion in their supply of credit to all firms: crowding-out gives wayto crowding-in. These predictions are confirmed by empirical evidence from the recent Spanish housingbubble. In the early years of the bubble, non-housing firms reduced their credit from banks that weremore exposed to the bubble, and firms that were more exposed to these banks had lower credit and outputgrowth. In its last years, these effects were reversed.
Keywords: housing booms; credit; investment; financial frictions; financial transmission; Spain
JEL Codes: E32; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Spanish housing boom (R31) | crowding-out of credit to non-housing firms (G21) |
| crowding-out of credit to non-housing firms (G21) | non-housing firms linked to banks with higher exposure experience lower credit growth (F65) |
| crowding-in effect (E62) | increase in non-housing credit growth at more exposed banks (F65) |
| increase in banks' net worth (G21) | expansion of credit supply across sectors (E51) |
| Spanish housing boom (R31) | increase in non-housing credit by 2008 (E51) |