Credit, Land Speculation, and Long-Run Economic Growth

TL;DR

This paper models how sector-specific credit expansions, especially in real estate, influence long-term productivity and growth, showing that unregulated land speculation can hinder economic development.

Contribution

It introduces a two-sector endogenous growth model highlighting the distinct effects of sectoral credit expansions on productivity and growth, emphasizing land speculation's role.

Findings

Sectoral credit expansions impact growth differently.

Land speculation can reduce productive investment.

Finite land prices persist even with low interest rates.

Abstract

This paper presents a model that studies the impact of credit expansions arising from increases in collateral values or lower interest rate policies on long-run productivity and economic growth in a two-sector endogenous growth economy, with the driver of growth lying in one sector (manufacturing) but not in the other (real estate). We show that it is not so much aggregate credit expansion that matters for long-run productivity and economic growth but sectoral credit expansions. Credit expansions associated mainly with relaxation of real estate financing (capital investment financing) will be productivity-and growth-retarding (enhancing). Without financial regulations, low interest rates and more expansionary monetary policy may so encourage land speculation using leverage that productive capital investment and economic growth are decreased. Unlike in standard macroeconomic models, in ours, the equilibrium price of land will be finite even if the safe rate of interest is less than the rate of output growth.