Growth, Housing, And Global Imbalances

In the decade leading to the Great Recession, the United States experienced rising house prices and current account deficits, whereas China and other fast‐growing Asian economies saw rising house prices accompanied by current account surpluses. To explain these differences, we study a transition path in a two‐country life‐cycle model with housing once the two economies become financially integrated. We allow for asymmetries in productivity growth, the loan‐to‐value ratio, the life‐cycle wage profile, and the population structure across countries. Our findings highlight that differences in the life‐cycle pattern of the wage income profile are key to obtaining our results.