Real Estate Price, Shadow Banking, and Investment : the Mix of Collateral and Crowding-Out Effects

We examined the ongoing debate over whether high real estate price promote or discourage investment by analyzing the heterogeneity effect of real estate price. The empirical evidence based on Chinese data indicates that rising real estate prices led to an increase in investment by private-owned enterprises (POEs) and a decrease by state-owned enterprises (SOEs). We incorporate a novel shadow banking channel into a DSGE model to examine the mix of crowding-in and crowding-out effects. In our model, while SOEs can borrow from the formal lending markets for their own investment or lend to the shadow banking system, POEs that have a tighter credit constraint are limited to borrowing from the shadow banking system. We find that the shadow banking channel for SOEs to lend to POEs plays a key role in generating the result of co-existence of crowding-in and crowding-out effects of real estate price. Our results indicate that financialization of non-financial firms has a non-negligible impact on macroeconomic fluctuations