Abstract
A local credit shock, induced by hurricane Katrina, propagated through banks’ internal networks to produce real and credit markets’ effects in distant regions. Driven by abnormal mortgage and housing demand in Katrina-hit areas, financially constrained multi-market banks reallocated resources towards the damaged areas leading to a credit tightening in the undamaged local markets. Depending on their housing supply elasticity, local housing markets in the undamaged regions responded to this credit disruption with a mix of housing prices and housing supply declines. These spillovers depended on undamaged markets’ financial linkages to disaster areas. In the undamaged regions, community banks, being local and unexposed to disaster areas, partially insulated their markets from these spillovers.
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