House prices and misallocation: the impact of the collateral channel on productivity

Abstract

This paper investigates the impact of local house price booms on capital misallocation within industries. Using the geographical variation provided by the Spanish housing boom (2003-2007), we show that firms exposed to positive local house price shocks received more bank credit and their investment grew more when they had a higher proportion of real estate assets. This collateral channel results in an increasing dispersion of the capital-labor ratio within industries. A counterfactual calculation suggests that the capital misallocation generated by this channel can account for around 40% of the TFP decline experienced by the Spanish economy during the housing boom.