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Financial integration, housing, and economic volatility

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  • Loutskina, Elena
  • Strahan, Philip E.

Abstract

The Great Recession illustrates the sensitivity of the economy to housing. This paper shows that financial integration, fostered by securitization and nationwide branching, amplified the positive effect of housing price shocks on the economy during the 1994–2006 period. We exploit variation in credit supply subsidies across local markets from government-sponsored enterprises to measure housing price changes unrelated to fundamentals. Using this instrument, we find that house price shocks spur economic growth. The effect is larger in localities more financially integrated, through both secondary loan market and bank branch networks. Financial integration thus raised the effect of collateral shocks on local economies, increasing economic volatility.

Suggested Citation

  • Loutskina, Elena & Strahan, Philip E., 2015. "Financial integration, housing, and economic volatility," Journal of Financial Economics, Elsevier, vol. 115(1), pages 25-41.
    • Handle: RePEc:eee:jfinec:v:115:y:2015:i:1:p:25-41
    DOI: 10.1016/j.jfineco.2014.09.009
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    More about this item

    Keywords

    Housing; Financial integration; Shale booms;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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