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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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    References listed on IDEAS

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    Cited by:

    1. Luc Laeven & Alexander Popov, 2016. "A Lost Generation? Education Decisions and Employment Outcomes during the US Housing Boom-Bust Cycle of the 2000s," American Economic Review, American Economic Association, vol. 106(5), pages 630-635, May.
    2. repec:eee:jbfina:v:83:y:2017:i:c:p:173-192 is not listed on IDEAS
    3. repec:eee:jfinec:v:125:y:2017:i:1:p:1-25 is not listed on IDEAS
    4. de Haas, R. & Brown, M. & Sokolov, V., 2015. "Regional Inflation, Financial Integration and Dollarization (This is a revision of CentER DP 2013-073)," Discussion Paper 2015-012, Tilburg University, Center for Economic Research.
    5. Buch, Claudia M. & Koetter, Michael & Ohls, Jana, 2016. "Banks and sovereign risk: A granular view," Journal of Financial Stability, Elsevier, vol. 25(C), pages 1-15.
    6. Landier, Augustin & Sraer, David & Thesmar, David, 2017. "Banking integration and house price co-movement," Journal of Financial Economics, Elsevier, vol. 125(1), pages 1-25.
    7. repec:eee:jaecon:v:64:y:2017:i:2:p:278-283 is not listed on IDEAS
    8. Brown, Martin & De Haas, Ralph & Sokolov, Vladimir, 2013. "Regional Inflation and Financial Dollarization," Working Papers on Finance 1327, University of St. Gallen, School of Finance.
    9. Popov, Alexander, 2017. "Evidence on finance and economic growth," Working Paper Series 2115, European Central Bank.
    10. Landier, Augustin & Sraer, David & Thesmar, David, 2017. "Banking integration and house price comovement," ESRB Working Paper Series 48, European Systemic Risk Board.
    11. Franziska Bremus & Claudia M. Buch, 2015. "Banking Market Structure and Macroeconomic Stability: Are Low-Income Countries Special?," Pacific Economic Review, Wiley Blackwell, vol. 20(1), pages 73-100, February.
    12. repec:eee:jfinec:v:125:y:2017:i:1:p:182-199 is not listed on IDEAS
    13. David P. Glancy, 2017. "Housing Bust, Bank Lending & Employment : Evidence from Multimarket Banks," Finance and Economics Discussion Series 2017-118, Board of Governors of the Federal Reserve System (U.S.).
    14. Bremus, Franziska & Krause, Thomas & Noth, Felix, 2017. "Bank-specific shocks and house price growth in the U.S," IWH Discussion Papers 3/2017, Halle Institute for Economic Research (IWH).
    15. Hahn Shik Lee & Woo Suk Lee, 2016. "Housing market volatility connectedness among G7 countries," Working Papers 1605, Research Institute for Market Economy, Sogang University.

    More about this item

    Keywords

    Housing; Financial integration; Shale booms;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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