Real Effects of Relaxing Financial Constraints for Homeowners: Evidence from Danish Firms

Abstract

Using detailed Danish micro-data, we study how a credit-driven boom in consumer demand affects firm dynamics. We exploit the introduction of interest-only mortgages in 2003 to estab- lish a structural break in Danish households’ spending capacity. A difference-in-differences approach indicates that the reform sharply increases consumers’ expenditure. This demand shock generates revenues and profits for Danish firms and results in the creation of at least 2,500 additional jobs, between 2004 and 2010. These positions are concentrated in the non- tradable sector. Our results indicate that mortgage markets shape the size and composition of real economic activity during expansion phases.