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International interest rates, the current account and housing markets

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  • Franjo, Luis

Abstract

Current account deficits and housing prices showed a strong positive correlation throughout the mid-90s to 2007. This paper studies the effect of a decrease in the international interest rate and in the downpayment requirement to buy a house on the joint behavior of the current account and housing prices. To this end, I build an open economy model with life-cycle heterogeneous agents, tradable goods and housing. I calibrate the model to the U.S. economy and compute the transition after a decrease in the interest rate and in the downpayment. The model is able to match the boom and (qualitatively) the cooling down in the housing market without a reversal in the interest rate, the increase in the homeownership rate, the simultaneous boom followed by a decline in non-housing consumption, and the emergence of a negative net foreign asset position.

Suggested Citation

  • Franjo, Luis, 2018. "International interest rates, the current account and housing markets," Economic Modelling, Elsevier, vol. 75(C), pages 268-280.
  • Handle: RePEc:eee:ecmode:v:75:y:2018:i:c:p:268-280
    DOI: 10.1016/j.econmod.2018.07.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Current account; Housing prices; Non-housing consumption; Homeownership; Collateralized borrowing constraints;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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