Do Asset Price Bubbles Have Negative Real Effects?

Abstract

In the recent recession and current economic recovery, policymakers have supported housing prices, expecting that improvement in the balance sheets of banks and consumers will spur economic activity. Considering the period of 1988 through 2006, we document that banks which are active in strong housing markets increase mortgage lending and decrease commercial lending. Firms that borrow from these banks have significantly lower investment. This decrease is especially pronounced for firms which are more capital constrained or borrow from smaller, more regional banks. From a policy standpoint, these results could mitigate any positive effects that come from supporting housing prices. JE