This paper studies the role of real estate prices on employment fluctuations. We focus on the relative role of collateral channels on both household and firm sides. To quantify the importance of each channel, we use empirical evidence from Italian municipality data and a quantitative model with financial frictions. First, we exploit variation in property tax changes across municipalities during Italy’s 2012 property tax reform. Then, we use the reduced form empirical estimates to calibrate our quantitative model that includes houses and commercial real estate charged with different property tax rates. The calibrated model shows that both collateral channels explain more than 80% of the decline in employment due to lower real estate prices induced by an increase in property taxes.

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.