This paper studies the role of real estate prices on employment fluctuations. We focus on the relative importance of the housing wealth and firm collateral channel on employment. We use empirical evidence from Italian municipality data and feature a quantitative model with financial frictions to quantify each channel. First, we exploit municipal-level variation in property tax changes to estimate its effect on labor, consumption, and real estate prices during Italy’s 2012 property tax reform. Then, we use the estimates to calibrate a quantitative model that includes houses and commercial real estate charged with different property tax rates. We find that both channels explain more than 50% of the employment decline due to higher property taxes. However, the firm collateral channel reduces employment by 20% more than the housing wealth channel.

This paper studies how a firm’s capital structure shapes the investment response during a sovereign debt crisis. To estimate the heterogeneous effect of capital structure on investment response to default risk, we use balance-sheet data for Italian firms during 2007-2015. We find that changes in default risk produce a negative response to investment, which changes with the capital structure. Specifically, the negative response of investment is amplified by at least 55% with higher leverage. However, investment sensitivity could be heightened or attenuated by about 15% with higher maturity, depending on whether firms are highly indebted. We build a partial equilibrium model of investment, short-term and long-term debt, and limited commitment to understanding the mechanisms that explain our empirical results. Our model shows that the effect of debt overhang, rollover risk and its interaction can qualitatively capture the empirical results obtained with Italian data for firms.