  This paper presents a model that studies the impact of credit expansions
arising from increases in collateral values or lower interest rate policies on
long-run productivity and economic growth in a two-sector endogenous growth
economy, with the driver of growth lying in one sector (manufacturing) but not
in the other (real estate). We show that it is not so much aggregate credit
expansion that matters for long-run productivity and economic growth but
sectoral credit expansions. Credit expansions associated mainly with relaxation
of real estate financing (capital investment financing) will be
productivity-and growth-retarding (enhancing). Without financial regulations,
low interest rates and more expansionary monetary policy may so encourage land
speculation using leverage that productive capital investment and economic
growth are decreased. Unlike in standard macroeconomic models, in ours, the
equilibrium price of land will be finite even if the safe rate of interest is
less than the rate of output growth.
