Series: Working Papers. 1823.
Author: Alberto Martín, Enrique Moral-Benito and Tom Schmitz.
Published in: The American Economic Review. Volume 111, Issue 3, March 2021, Pages 1013-1053
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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.