Financial development and the effect of cross‐border bank flows on house prices

We analyze the role of financial development as a buffer to diminish the effect of cross‐border bank flows shocks on house prices across 38 countries. In less financially developed countries, the observed response is markedly positive. As development increases, the response is tempered and becomes less important. Cross‐border bank flows shocks are important in explaining the historical dynamics of house prices in financially less developed countries, while monetary policy shocks are key in the most financially developed markets. Heterogeneity in responses within each level of financial development is associated with levels of maximum loan‐to‐value ratios and a ratio of cross‐border bank inflows over total liabilities abroad.