Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms

Abstract

QUESTION Cross-border capital flows can affect the real economy through different channels, for instance by changing the prices of real estate, which has a large weight in economies' income and wealth. Which role do real estate markets play in the transmission of capital flow shocks to economic growth? What are the transmission mechanisms? This paper addresses these questions by studying the impact of capital flow shocks on economic growth across German cities. CONTRIBUTION We contribute to the literature in multiple ways. First, we provide a novel identification strategy, which captures the tightness of the real estate markets across German cities. Second, we construct a data set for commercial and residential real estate prices at the city level, matched with bank-firm level data from the German credit registry. This unique data set enables us to study the role of real estate markets in the transmission of capital flow shocks. RESULTS Our results show that capital flow shocks, as measured by the sovereign bond spread of Southern European countries over Germany, have a more significant impact on economic growth in cities that are more exposed to tightness in local real estate markets. We estimate that, during our sample period (2009-2014), for every 100-basis point increase in the interest rate spread, the most exposed German cities grow 15-25 basis points more than the least exposed ones. Moreover, the differential response of commercial property prices can explain most of this growth differential. When we identify the transmission mechanism, we find that firms with more real estate collateral received more credit as capital flew into Germany. These firms, as a consequence, invested and hired more, thereby contributing to higher output growth. As opposed to this, we find no evidence of capital misallocation in Germany, possibly because the German real estate boom took place without a credit boom during the sample period studied. NICHTTECHNISCHE ZUSAMMENFASSUNG FRAGESTELLUNG Grenzüberschreitende Kapitalströme können die Wirtschaftsleistung einer Volkswirtschaft durch verschiedene Kanäle beeinflussen, zum Beispiel über das Auf und Ab an den Immobilienmärkten, die einen großen Anteil am Volkseinkommen und-vermögen ausmachen. Welche Rolle spielen Immobilienmärkte bei der Übertragung von Schocks in den Kapitalströmen auf das Wirtschaftswachstum? Welches sind die Mechanismen, über die sich die Übertragung vollzieht? Dieses Papier adressiert diese Fragen, indem es untersucht, wie Schocks in den grenzüberschreitenden Kapitalströmen auf das Wirtschaftswachstum deutscher Städte wirken. BEITRAG Wir tragen zur bestehenden Literatur in mehrerlei Hinsicht bei. Erstens basiert unsere Analyse auf einer innovativen Identifikationsstrategie, die Anspannungen auf den Immobilienmärkten der einzelnen Städte erfasst. Zweitens konstruieren wir einen Datensatz, der Gewerbe-und Wohnimmobilienpreise auf Städteebene mit Daten kombiniert, die auf dem deutschen Kreditregister basieren. Dieser umfangreiche Datensatz ermöglicht es, die Rolle...