Firm creation, entry costs, and house‐price volatility

Amid growing work on the link between firm creation and cyclical housing‐market dynamics, we document a significant, positive, and robust cross‐country relationship between the level of new firm creation and the cyclical volatility of house prices. Using a business‐cycle model with endogenous firm entry, housing, and housing‐finance constraints and shocks, we show that, via general equilibrium effects, greater average firm entry can be a powerful amplification mechanism of housing‐finance shocks. These shocks and constraints play a key role in quantitatively rationalizing the link between firm creation and house‐price volatility across countries.

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