Banking Competition, Housing Prices and Macroeconomic Stability


  • Corresponding author: Oscar Arce, CNMV, Research and Statistics Department, Calle Miguel Ángel 11, 28010 Madrid, Spain. Email:

  • We are grateful to Larry Christiano, Giancarlo Corsetti, Giovanni Dell'Ariccia, Martin Ellison, Jordi Galí, Matteo Iacoviello, Juan F. Jimeno, Robert Kollman, David López-Salido, Caterina Mendicino, Gabriel Pérez-Quirós, José-Victor Ríos-Rull, Jesús Saurina, Carlos Thomas, Garry Young and seminar participants at the second International Conference on Macroeconomics at Fundación Rafael del Pino (Madrid), Bank of Spain, CCBS/WGEM workshop at Bank of England, Sveriges Riksbank workshop on ‘Household Indebtness, House Prices and the Economy’, EACBN/CREI conference on ‘Business Cycle Developments, Financial Fragility, Housing and Commodity Prices’, European Central Bank workshop on ‘Monetary policy transmission mechanism in the euro area in its first 10 years’ and, especially editor Andrew Scott and one anonymous referee for valuable comments. The opinions expressed here are solely those of the authors and do not necessarily reflect the views of the CNMV. Javier Andrés acknowledges financial support by CICYT grants ECO2008-04669 and ECO2011-29050.


We develop a macroeconomic model with an imperfectly competitive bank-loans market and collateral constraints that tie investors’ credit capacity to the value of their real estate holdings. Lending margins are optimally set by banks and have a significant effect on aggregate variables. Over the long run, stronger banking competition increases output by triggering a reallocation of available collateral towards investors. In the short-run, output, credit and housing prices are more responsive on impact to shocks in an environment of highly competitive banks. Also, stronger banking competition implies higher (lower) persistency of credit and output after a monetary (credit crunch) shock.