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House Prices Drive Current Accounts: Evidence from Property Tax Variations

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  • Geerolf, François
  • Grjebine, Thomas

Abstract

We study the causal link between house prices and current accounts. Across time and countries, we find a very large and significant impact of house prices on current accounts. In order to rule out endogeneity concerns, we instrument house prices for a panel of countries, using property tax variations. A 10% instrumented appreciation in house prices leads to a deterioration in the current account of 1.7% of GDP. These results are very robust to the inclusion of the determinants of current accounts. Following a house price increase, private savings decrease, through wealth effects rather than consumer-finance based mechanisms, while non-residential investment rises through a relaxation of financing constraints for firms.

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Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Docweb) with number 1315.

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Length: 46 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:cpm:docweb:1315

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Keywords: current accounts;

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  12. Andrea Ferrero, 2012. "House price booms, current account deficits, and low interest rates," Staff Reports, Federal Reserve Bank of New York 541, Federal Reserve Bank of New York.
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  14. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(3), pages 246-265, April.
  15. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1499-1528, November.
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  17. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
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