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Prudential policies, credit supply and house prices: evidence from Italy

Pierluigi Bologna (), Wanda Cornacchia () and Maddalena Galardo
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Wanda Cornacchia: Bank of Italy

No 1294, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We estimate the causal effect of a mortgage supply expansion on house prices by using an exogenous change in prudential regulation: the abolition in 2006 of a banks' maturity transformation limit. After the repeal of the prudential rule, credit increased only for the banks that were previously constrained by the regulation, while it remained unchanged for the other banks. Such differential response rules out demand-based explanations and fully identify the rule abolition as an exogenous shock that we exploit as an instrument for mortgage supply expansion. We estimate the elasticity of house price growth to new mortgage credit to be close to 5 percent. Our results also show that the effect of a mortgage supply expansion on house prices significantly differs across municipalities' and borrowers' characteristics.

Keywords: prudential policy; credit supply; house prices; financial constraints (search for similar items in EconPapers)
JEL-codes: G21 G28 R21 R31 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-ure
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