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Collateral damage: effects of the Japanese real estate collapse on credit availability and real activity in the United States

  • Joe Peek
  • Eric S. Rosengren

The dramatic 70 percent decline in Japanese commercial real estate prices from their peak in 1990 provides a natural experiment to test the extent to which a loan supply shock can affect real economic activity. Because the shock was external to U.S. credit markets, yet connected through the substantial penetration of U.S. lending markets by Japanese banks, this event allows us to identify an exogenous loan supply shock and ultimately link that shock to construction activity in major commercial real estate markets in the United States. We use panel data that exploit the variation across geographically distinct commercial real estate markets in the United States, both in degree of Japanese bank penetration and in local demand conditions, to establish conclusively that loan supply shocks emanating from loan problems in Japan had real effects on economic activity in the United States. Revised 1999.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 97-5.

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Date of creation: 1997
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Publication status: Published in American Economic Review (March 2000): 30-45
Handle: RePEc:fip:fedbwp:97-5
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  1. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  2. Jeremy C. Stein, 1995. "An Adverse Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," NBER Working Papers 5217, National Bureau of Economic Research, Inc.
  3. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-69, June.
  4. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  5. Gibson, Michael S, 1995. "Can Bank Health Affect Investment? Evidence from Japan," The Journal of Business, University of Chicago Press, vol. 68(3), pages 281-308, July.
  6. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  7. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
  8. Allen B. Frankel & Paul B. Morgan, 1992. "Deregulation and competition in Japanese banking," Proceedings 383, Federal Reserve Bank of Chicago.
  9. Steven A. Sharpe, 1995. "Bank capitalization, regulation, and the credit crunch: a critical review of the research findings," Finance and Economics Discussion Series 95-20, Board of Governors of the Federal Reserve System (U.S.).
  10. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers 93-2, Federal Reserve Bank of Boston.
  11. Allen B. Frankel & Paul B. Morgan, 1992. "Deregulation and competition in Japanese banking," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Aug, pages 579-593.
  12. Daniel E. Nolle & Rama Seth, 1996. "Do banks follow their customers abroad?," Research Paper 9620, Federal Reserve Bank of New York.
  13. Diana Hancock & James A. Wilcox, 1992. "The effect on bank assets of business conditions and capital shortfalls," Proceedings 373, Federal Reserve Bank of Chicago.
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