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  • November 2017
  • Article
  • Review of Financial Studies

Credit-Induced Boom and Bust

By: Marco Di Maggio and Amir Kermani
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Abstract

Can a credit expansion induce a boom and bust in house prices and real economic activity? This paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. Specifically, we exploit the heterogeneity in the market share of national banks across counties and in state anti-predatory laws to instrument for an outward shift in the supply of credit. First, a comparison between counties in the top and bottom deciles of presence of national banks in states with anti-predatory laws suggests that the preemption regulation resulted in an 11% increase in annual lending in the 2004–2006 period. Our estimates show that this lending increase is associated with a 3.3% rise in annual house price growth rate and a 2.2% expansion of employment in the non-tradable sectors. These effects are followed by a decline in loan origination, house prices, and employment of similar magnitude in subsequent years. Furthermore, we show that the increase in the supply of credit reduced mortgage delinquency rates during the boom years but increased them in bust years. Finally, these effects are stronger for subprime and inelastic regions.

Keywords

Great Recession; Subprime; Credit Supply; Credit Expansion; Household Leverage; Household Debt; Preemption Rule; Mortgages; Laws and Statutes; Credit; Household; Borrowing and Debt; Economic Slowdown and Stagnation

Citation

Di Maggio, Marco, and Amir Kermani. "Credit-Induced Boom and Bust." Review of Financial Studies 30, no. 11 (November 2017): 3711–3758. (Lead article and Editor's choice Winner of the 2018 RFS Rising Scholar Award.)
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About The Author

Marco Di Maggio

Finance
→More Publications

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More from the Authors
  • Adyen: Reshaping the Payment Ecosystem By: Marco Di Maggio, Antonio Moreno and Elena Corsi
  • Lupoli Companies: Riverwalk - Making an Impact By: Richard S. Ruback, Marco Di Maggio, Dave Habeeb and Ruth Page
  • Ava Labs: Navigating the Next Blockchain By: Marco Di Maggio and Wenyao Sha
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