Recent evidence suggests that credit booms and asset price bubbles may undermine economic growth even as they occur, regardless of whether a crisis follows, by crowding out investment in more productive, R&D-intensive industries. This paper incorporates Schumpeterian endogenous growth into a DSGE model with credit-constrained entrepreneurs to show how shocks affecting firms' access to credit can generate boom-bust cycles featuring large fluctuations in land prices, consumption, and investment. During the expansion, rising land prices tend to crowd out capital and (especially) R&D investment: in the long run, this results in lower productivity levels, which in turn implies lower levels of aggregate output and consumption. Moreover, higher initial loan-to-value ratios tend to be associated with larger macroeconomic fluctuations. A counter-cyclical LTV ratio targeting credit growth has relevant stabilization effects but brings about small gains in terms of long-run consumption levels, and thus of welfare.
JEL Codes: E22, E32, E44, O30, O40.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
macroprudential policy, Schumpeterian Growth, Financial frictions, Land prices