Asset Price Spillover, Collateral and Crises : With an Application to Property Market Policy

A multi-period collateral-constrained model economy is built to study the impact of land supply elasticity and land use regulation. For sufficiently adverse shocks constrained entrepreneurs may need to liquidate their assets for debt repayment. This effect can spillover to the residential property market, to the point when households are forced to default on their mortgages, which leads to a feedback effect on asset liquidation (a quot;crisisquot;). Interestingly, while both converting costs and land use regulation tend to magnify the effect of adverse shock, the former generates an asymmetric effect between a positive and a negative shock on the land market, and the latter tends to raise the likelihood of a crisis, by raising the threshold value which triggers liquidation on entrepreneurial asset