Unintended Consequences of QE: Real Estate Prices and Financial Stability *

Abstract

We analyze the effects of central bank corporate debt purchases in a setting where the banking sector frictions they are supposed to address do not exist. We find that banks reallocate funding almost entirely to the real estate sector, which fuels real estate overvaluation and impairs financial stability. Our results imply an elasticity of residential real estate prices to credit supply of 0.84, which is considerably higher than prior estimates in the literature. Our findings show that in economies that do not suffer from credit supply frictions, central bank policies that further stimulate loan provision come with substantial adverse effects. * We would like to thank Peter Bednarek (discussant), Indraneel Chakraborty (discussant), Martina Jasova (discussant), Francois Koulischer (disussant), Alexander Popov (discussant), Simon Stehle (discussant),