The Financial Transmission of Housing Booms: Evidence from Spain

68 Pages Posted: 26 Jun 2018 Last revised: 4 Oct 2019

See all articles by Alberto Martin

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Enrique Moral-Benito

Banco de España; Universidad Carlos III de Madrid

Tom Schmitz

Bocconi University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 2018

Abstract

What are the effects of a housing bubble on the rest of the economy? We show that if firms and banks

face collateral constraints, a housing bubble initially raises credit demand by housing firms while leaving

credit supply unaffected. It therefore crowds out credit to non-housing firms. If time passes and the

bubble lasts, however, housing firms eventually pay back their higher loans. This leads to an increase in

banks' net worth and thus to an expansion in their supply of credit to all firms: crowding-out gives way

to crowding-in. These predictions are confirmed by empirical evidence from the recent Spanish housing

bubble. In the early years of the bubble, non-housing firms reduced their credit from banks that were

more exposed to the bubble, and firms that were more exposed to these banks had lower credit and output

growth. In its last years, these effects were reversed.

Keywords: credit, Financial Frictions, Financial Transmission, housing booms, investment, Spain

JEL Classification: E32, E44, G21

Suggested Citation

Martin, Alberto and Moral-Benito, Enrique and Schmitz, Tom, The Financial Transmission of Housing Booms: Evidence from Spain (June 2018). CEPR Discussion Paper No. DP12999. Available at SSRN: https://ssrn.com/abstract=3202271

Alberto Martin (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Enrique Moral-Benito

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Tom Schmitz

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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