Working Paper: NBER ID: w18027
Authors: Raghuram Rajan; Rodney Ramcharan
Abstract: Does credit availability exacerbate asset price inflation? Are there long run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render temporary credit induced booms and busts persistent. We draw lessons for regulatory policy.
Keywords: credit availability; land prices; asset price inflation; bank failures; regulatory policy
JEL Codes: G01; G21; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit Availability (G21) | Land Prices (R31) |
| Number of Banks (G21) | Land Prices (R31) |
| Credit Availability (G21) | Positive Fundamentals Interaction Effect (G40) |
| Positive Fundamentals (G23) | Land Prices (R31) |
| Credit Availability (G21) | Bank Failures (G28) |
| Credit Availability (G21) | Long-term Consequences on Land Prices (R31) |
| Credit Availability (G21) | Number of Banks (G21) |