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House Prices Booms and Current Account Deficits

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  • Andrea Ferrero

    (Federal Reserve Bank of New York)

Abstract

One of the most striking features of the period before the Great Recession of 2007-2009 is the strong positive correlation between house price appreciation and current account deficits in countries that have subsequently experienced the highest degree of financial turmoil. A progressive relaxation of credit constraints can rationalize this empirical observation. Lower collateral requirements facilitate access to external funding and drive up house prices. Households increase their leverage borrowing from the rest of the world so that the current account turns negative. Several pieces of evidence support this view. The paper further compares this mechanism with the role of monetary policy, the exchange rate regime and foreign saving shocks in accounting for the evidence.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1386.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1386

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  1. Marcel Fratzscher & Luciana Juvenal & Lucio Sarno, 2008. "Asset prices, exchange rates and the current account," Working Papers 2008-031, Federal Reserve Bank of St. Louis.
  2. Aizenman, Joshua & Jinjarak, Yothin, 2008. "Current account patterns and national real estate markets," Santa Cruz Department of Economics, Working Paper Series qt1rh4s127, Department of Economics, UC Santa Cruz.
  3. Monacelli, Tommaso, 2006. "New Keynesian Models, Durable Goods and Collateral Constraints," CEPR Discussion Papers 5916, C.E.P.R. Discussion Papers.
  4. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2010. "Can Cheap Credit Explain the Housing Boom?," NBER Working Papers 16230, National Bureau of Economic Research, Inc.
  5. Andrea Ferrero & Mark Gertler & Lars E.O. Svensson, 2008. "Current account dynamics and monetary policy," Working Paper Series 2008-26, Federal Reserve Bank of San Francisco.
  6. Galí, Jordi & Gertler, Mark (ed.), 2010. "International Dimensions of Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226278865, янваÑ.
  7. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
  8. Matteo Iacoviello & Raoul Minetti, 2003. "Financial Liberalization And The Sensitivity Of House Prices To Monetary Policy: Theory And Evidence," Manchester School, University of Manchester, vol. 71(1), pages 20-34, January.
  9. Jordi Galí­ & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1, octubre-d.
  10. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  11. Joseph Nichols & Anthony Pennington-Cross & Anthony Yezer, 2004. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 197-219, November.
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Cited by:
  1. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters, in: Housing and the Financial Crisis, pages 235-299 National Bureau of Economic Research, Inc.
  2. Pei Kuang, 2013. "Imperfect Knowledge about Asset Prices and Credit Cycles," Discussion Papers 13-02, Department of Economics, University of Birmingham.
  3. Tomasz Wieladek & Sergi Lanau, 2012. "Financial Regulation and the Current Account," IMF Working Papers 12/98, International Monetary Fund.

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