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The residential collateral channel

Bahaj, Saleem A., Foulis, Angus and Pinter, Gabor (2016) The residential collateral channel. CFM discussion paper series (CFM-DP2016-07). Centre For Macroeconomics, London, UK.

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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 the combined residential collateral of a firm’s directors estimated to increase the firm’s investment by £0.02 and total wage costs by £0.02. 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 (around 70% of GDP) 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. An estimated general equilibrium model with collateral constrained firms is used to quantify the aggregate effects of both channels.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2016 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 13 Dec 2017 10:17
Last Modified: 16 Oct 2019 23:27
URI: http://eprints.lse.ac.uk/id/eprint/86240

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