The Residential Collateral Channel

Saleem Bahaj, Angus Foulis and Gabor Pinter

No 1607, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: We present evidence on a new macroeconomic channel which we call the residential collateral channel. Through this channel, an increase in real estate prices expands firm activity by enabling company directors to utilise their residential property as a source of funds for their business. This channel is a key determinant of investment and job creation, with a £1 increase in directors’ residential collateral estimated to increase investment by £0.07 and total wage costs by £0.10. To show this, we use a unique combination of UK datasets including firm-level accounting data matched with transaction-level house price data and loan-level residential mortgage data. The aggregate value of residential collateral held by company directors suggests that this channel has important macroeconomic effects. We complement this with further evidence on the corporate collateral channel whereby an increase in real estate prices directly expands firm activity by enabling businesses to borrow more against their corporate real estate. A simple general equilibrium model with collateral constrained firms is used to quantify the aggregate effects of both channels.

Pages: 39 pages
Date: 2016-02, Revised 2016-06
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (7)

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http://www.centreformacroeconomics.ac.uk/Discussio ... MDP2016-07-Paper.pdf Revised version, 2016 (application/pdf)

Related works:
Working Paper: Home values and firm behaviour (2017)
Working Paper: Home Values and Firm Behaviour (2017)
Working Paper: Home values and firm behaviour (2017)
Working Paper: The residential collateral channel (2016)
Working Paper: The Residential Collateral Channel (2016)
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