Firm Creation, Entry Costs, and House-Price Volatility

Reforms aimed at reducing the regulatory barriers to firm entry and bolstering greater firm creation have gained significant prominence in economies beyond the U.S. Given these facts and amid growing work on the link between firm creation and cyclical housing-market dynamics, we document a significant, positive, and robust crosscountry 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, we show how greater average firm entry can be a powerful amplification mechanism of housing-market shocks amid housing finance constraints, with these shocks and frictions playing a key role in quantitatively rationalizing the link between firm creation and house-price volatility across countries