Banking Competition, Housing Prices and Macroeconomic Stability

We develop a macroeconomic model with an imperfectly competitive bank-loans market and collateral constraints that tie investors credit capacity to the value of their real estate holdings. Lending margins are optimally set by banks and have a significant effect on aggregate variables. Over the long run, stronger banking competition increases output by triggering a reallocation of available collateral towards investors. In the short-run, output, credit and housing prices are more responsive on impact to shocks in an environment of highly competitive banks. Also, stronger banking competition implies higher (lower) persistency of credit and output after a monetary (credit crunch) shock.