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

Abstract

We study how a capital flow shock impacts German cities’ GDP growth depending on the state of their local real estate markets. Identification exploits a policy framework assigning refugees to cities on a quasi-random basis and variation in non-developable area for the construction of a measure of exposure to local real estate market tightness. We estimate that the German cities most exposed to real estate market tightness grew at least 1.9 percentage points more than the least exposed ones, cumulatively, during the 2009-2014 period. Capital inflows shift credit to firms with more collateral. More collateral also leads firms to hire and invest more in response to these shocks.

Keywords: Cross-border Flows, Capital Flows, Collateral, City Business Cycles, Credit, Germany, GIPS Spread, Real Estate, Tangible Assets

JEL Classification: F3, R3, E3