Credit Expansion, Competition, and House Prices
45 Pages Posted: 3 Sep 2016 Last revised: 17 Nov 2016
Date Written: November 16, 2016
We document the effect of policy-induced credit supply on fueling asset prices that lead to financial crises and broad economic outcomes. By comparing loans that fall under the current conforming loan limit (CLL) to those under the old limit last year in a difference-in-differences setting, we find a direct effect of CLL change on credit supply and on the prices of homes financed by the expanded credit. An increase in credit supply in the new conforming loan market also crowds out private capital in the jumbo loan market. Additionally, we find significant effects of CLL change on broad economic outcomes, such as regional home prices, employment, and business growth.
Keywords: Conforming loan limit; credit supply; financial crisis
JEL Classification: D12; G10; R20
Suggested Citation: Suggested Citation