Government-Directed Bank Lending, Human Capital, and Housing Price Inflation
We investigate the effects of government-directed capital allocation. We find that the results of capital direction crucially depend on the availability of human capital in the targeted area. When human capital in the area is high, additional credit is absorbed in small businesses and future welfare outlays are reduced. In contrast, if human capital is relatively low, then capital flows to mortgages and results in (housing price) inflation: areas with one standard deviation lower human capital receive 2.3% more mortgages and experience 6% higher housing price inflation. Our results point towards the potential pitfalls of sidestepping market-driven credit allocation.
bank lending, human capital, inflation, housing price
SMU Cox: Finance (Topic)