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Financial frictions, real estate collateral, and small firm activity in Europe

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Abstract

We observe significant heterogeneity in the correlation between changes in house prices and the growth of small firms across certain countries in Europe. We find that, overall, the correlation is far greater in Southern Europe than in Northern Europe. Using a simple model, we show that this heterogeneity may relate to financial frictions in a country. We confirm the model?s propositions in a number of empirical analyses for the following countries in Northern and Southern Europe: the United Kingdom, Norway, France, Italy, Spain, and Portugal. Small firms in countries with higher financial frictions (for example, places where bankruptcy resolution is more difficult and/or takes longer) see a greater dependence on ?stable? real estate collateral. This is most pronounced for opaque (for example, very young) firms. Through an extension to our model and our choice of specification, we show that our findings are most consistent with a collateral-value-based credit supply channel and rule out a consumer-driven demand effect.

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  • Ryan N. Banerjee & Kristian S. Blickle, 2018. "Financial frictions, real estate collateral, and small firm activity in Europe," Staff Reports 868, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:868
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    Cited by:

    1. Arun Gupta & Horacio Sapriza & Vladimir Yankov, 2023. "The Collateral Channel and Bank Credit," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, vol. 23(33), October.
    2. Moramarco, Graziano, 2024. "Financial-cycle ratios and medium-term predictions of GDP: Evidence from the United States," International Journal of Forecasting, Elsevier, vol. 40(2), pages 777-795.
    3. Horan, Aoife & Jarmulska, Barbara & Ryan, Ellen, 2023. "Asset prices, collateral and bank lending: the case of Covid-19 and real estate," Working Paper Series 2823, European Central Bank.
    4. Blickle, Kristian, 2022. "Local banks, credit supply, and house prices," Journal of Financial Economics, Elsevier, vol. 143(2), pages 876-896.
    5. Suh, Hyunduk & Yang, Jin Young, 2024. "Housing cycle and firm investment: International firm-level evidence," Journal of Asian Economics, Elsevier, vol. 92(C).

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    More about this item

    Keywords

    firm financing; real estate collateral; credit supply; bankruptcy laws; financial frictions;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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