The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel

Gan, Jie

This paper studies how a shock to the financial health of banks, caused by a decline in the asset markets, affects the real economy. The land-market collapse in Japan provides an ideal testing field in separating the impact of a loan supply shock from demand shocks. I find that banks with greater real estate exposure have to reduce lending. Firms' investment and market valuation are negatively associated with their top lender's real estate exposure. The lending channel is economically important: it accounts for one-third of lending contraction, one-fifth of the decline in investment, and a quarter of value loss.


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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 255
Published Here
October 26, 2012