Dynamism Diminished: The Role of Housing Markets and Credit Conditions

We estimate the effects of house price changes on young-firm employment shares and industrylevel employment growth in local economies.A novel test shows that house price effects on local economies work through wealth, liquidity and collateral effects on the propensity to start new firms and expand young ones.Aggregating local effects to the national level, our estimates imply that housing market ups and downs play a major role -as transmission channel and driving force -in medium-run fluctuations in young-firm employment shares in recent decades.We also find a distinct and smaller role for locally exogenous loan-supply shifts.