Prudential Policies, Credit Supply and House Prices: Evidence from Italy

76 Pages Posted: 13 Oct 2020

Date Written: September 29, 2020

Abstract

We estimate the causal effect of a mortgage supply expansion on house prices by using an exogenous change in prudential regulation: the abolition in 2006 of a banks' maturity transformation limit. After the repeal of the prudential rule, credit increased only for the banks that were previously constrained by the regulation, while it remained unchanged for the other banks. Such differential response rules out demand-based explanations and fully identify the rule abolition as an exogenous shock that we exploit as an instrument for mortgage supply expansion. We estimate the elasticity of house price growth to new mortgage credit to be close to 5 percent. Our results also show that the effect of a mortgage supply expansion on house prices significantly differs across municipalities' and borrowers' characteristics.

Keywords: prudential policy, credit supply, house prices, financial constraints

JEL Classification: G21, G28, R21, R31

Suggested Citation

Bologna, Pierluigi and Cornacchia, Wanda and Galardo, Maddalena, Prudential Policies, Credit Supply and House Prices: Evidence from Italy (September 29, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1294, Available at SSRN: https://ssrn.com/abstract=3710119 or http://dx.doi.org/10.2139/ssrn.3710119

Pierluigi Bologna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Wanda Cornacchia

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Maddalena Galardo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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