The Financial Transmission of Housing Bubbles: Evidence from Spain
66 Pages Posted: 26 Feb 2019
Date Written: February 22, 2019
How do housing bubbles affect other economic sectors? We show that in the presence of collateral constraints, a bubble initially raises housing credit demand and crowds out credit to non-housing firms. If the bubble lasts, however, housing credit repayments raise banks’ net worth and expand credit supply, so that crowding-out eventually gives way to crowding-in. This is consistent with evidence from the recent Spanish housing bubble. Initially, credit growth of non-housing firms was lower at banks with higher bubble exposure, and firms relying on these banks exhibited lower credit and output growth. During the bubble’s last years, these effects reversed.
Keywords: Housing bubble, Credit, Investment, Financial Frictions, Financial Transmission, Spain
JEL Classification: E32, E44, G21
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