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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. 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.
  2. Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers 6326, C.E.P.R. Discussion Papers.
  3. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  4. Güneş Kamber & Stephen Millard, 2010. "Using estimated models to assess nominal and real rigidities in the United Kingdom," Reserve Bank of New Zealand Discussion Paper Series DP2010/05, Reserve Bank of New Zealand.
  5. 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.
  6. Vincent Sterk, 2010. "Home Equity, Mobility, and Macroeconomic Fluctuations," DNB Working Papers 265, Netherlands Central Bank, Research Department.
  7. 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.
  8. Simon Burgess & Hélène Turon, 2005. "Unemployment dynamics in Britain," Economic Journal, Royal Economic Society, vol. 115(503), pages 423-448, 04.
  9. Christian A. L. Hilber & Wouter Vermeulen, 2012. "The impact of supply constraints on house prices in England," LSE Research Online Documents on Economics 59254, London School of Economics and Political Science, LSE Library.
  10. Francesco Zanetti, 2006. "Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model," Computing in Economics and Finance 2006 445, Society for Computational Economics.
  11. Jennifer C. Smith, 2011. "The Ins and Outs of UK Unemployment," Economic Journal, Royal Economic Society, vol. 121(552), pages 402-444, 05.
  12. Nikolay Iskrev, 2009. "Local Identification in DSGE Models," Working Papers w200907, Banco de Portugal, Economics and Research Department.
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