The Financial Transmission of Housing Bubbles: Evidence from Spain

60 Pages Posted: 19 Jul 2018

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: July 18, 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: housing bubble, credit, investment, financial frictions, financial transmission, Spain

JEL Classification: E32, E44, G21

Suggested Citation

Martin, Alberto and Moral-Benito, Enrique and Schmitz, Tom, The Financial Transmission of Housing Bubbles: Evidence from Spain (July 18, 2018). Banco de Espana Working Paper No. 1823. Available at SSRN: https://ssrn.com/abstract=3215736 or http://dx.doi.org/10.2139/ssrn.3215736

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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