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House Prices and Job Losses

Listed author(s):
  • Gabor Pinter

    ()

    (Bank of England
    Centre for Macroeconomics (CFM))

Why are house prices -80% correlated with job losses over the UK business cycle? My paper studies this striking fact together with the strong comovements between house prices and labour market variables in general. First, a regional panel is estimated to quantify the impact of house prices on the unemployment, job finding and job separation rates, whereby rejection rates of planning applications are used as instruments to find exogenous variation in house prices. Second, an orthogonalised VAR is used to estimate the aggregate impact of house price shocks. Both methods confirm the large impact of house price shocks on labour market variables and credit supply. To understand the mechanism, a general equilibrium model with collateral constraints, endogenous job separation and housing shocks is confronted with macroeconomic data via Bayesian methods. The results suggest that shocks to house prices (i) explain about 10% of output fluctuations and about 20% of fluctuations in corporate credit, unemployment and job separation rates via the collateral channel over the forecast horizon, and (ii) were a major cause in triggering the 1990 and 2008 recessions in the UK.

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File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2015/CFMDP2015-07-Paper.pdf
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Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1507.

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Length: 44 pages
Date of creation: Mar 2015
Handle: RePEc:cfm:wpaper:1507
Contact details of provider: Web page: http://www.centreformacroeconomics.ac.uk/

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  1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
  2. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
  3. Günes Kamber & Stephen Millard, 2012. "Using Estimated Models to Assess Nominal and Real Rigidities in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 97-119, December.
  4. Christian A. L. Hilber & Wouter Vermeulen, 2016. "The Impact of Supply Constraints on House Prices in England," Economic Journal, Royal Economic Society, vol. 126(591), pages 358-405, 03.
  5. Mumtaz, Haroon & Zanetti, Francesco, 2016. "The Effect Of Labor And Financial Frictions On Aggregate Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 20(01), pages 313-341, January.
  6. Iskrev, Nikolay, 2010. "Local identification in DSGE models," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 189-202, March.
  7. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
  8. Sterk, Vincent, 2015. "Home equity, mobility, and macroeconomic fluctuations," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 16-32.
  9. Jennifer C. Smith, 2011. "The Ins and Outs of UK Unemployment," Economic Journal, Royal Economic Society, vol. 121(552), pages 402-444, 05.
  10. Renato Faccini & Stephen Millard & Francesco Zanetti, 2013. "Wage Rigidities in an Estimated Dynamic, Stochastic, General Equilibrium Model of the UK Labour Market," Manchester School, University of Manchester, vol. 81, pages 66-99, 09.
  11. Amaral, Pedro S. & Tasci, Murat, 2016. "The cyclical behavior of equilibrium unemployment and vacancies across OECD countries," European Economic Review, Elsevier, vol. 84(C), pages 184-201.
  12. Simon Burgess & Hélène Turon, 2005. "Unemployment dynamics in Britain," Economic Journal, Royal Economic Society, vol. 115(503), pages 423-448, 04.
  13. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
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