Transmission of Household and Business Credit Shocks in Emerging Markets: The Role of Real Estate

We study the role of real estate in the transmission of household and business credit shocks to the economy. To this end, we construct a small open economy real business cycle model with households and entrepreneurs, who hold real estate and face credit constraints on their borrowing. The impulse response analysis shows that both household and business credit shocks lead to an expansion in the economy, with business credit having a larger effect. Real estate plays an important role in understanding the response of the economy to credit shocks. A credit expansion in one sector increases house prices, which raises the value of real estate holdings of the other sector and generates spillover effects between sectors. As a result, household and business credit shocks lead to similar responses. Without housing, the two types of shocks affect the key macroeconomic variables differently with only business credit shocks leading to an expansion. Our findings suggest that housing as a common asset provides a transmission channel between the sectors that mitigates the differences in the responses to the credit shocks.