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International Interest Rates and Housing Markets

Author

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  • Luis Franjo

    () (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)

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 during that period on the joint behavior of the current account and housing prices. To this end, I build a small open economy model with life-cycle heterogeneous agents and two goods: tradable (non-housing) and non-tradable (housing). I calibrate the model to replicate selected aggregate statistics of the U.S. economy and compute the transition after the decrease in the interest rate and in the downpayment. The model is able to match some relevant facts: the boom and the bust (after 2007) in the housing market, where the bust, as the data show, occurs without a reversal in the interest rate; the increase in the homeownership rate; the simultaneous boom - and bust - in non-housing consumption; and the coexistence of borrowing from abroad with a current account deficit throughout the transition.

Suggested Citation

  • Luis Franjo, 2015. "International Interest Rates and Housing Markets," Working Papers 201501, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Feb 2015.
  • Handle: RePEc:cif:wpaper:201501
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    File URL: http://infoscience.epfl.ch/record/205145/files/CFP2015_01.pdf
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    References listed on IDEAS

    as
    1. Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77-122.
    2. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
    3. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, August.
    4. University of Chicago & Pedro Gete, 2009. "Housing Markets and Current Account Dynamics," 2009 Meeting Papers 427, Society for Economic Dynamics.
    5. Duca, John V & Muellbauer, John & Murphy, Anthony, 2011. "Shifting Credit Standards and the Boom and Bust in US House Prices," CEPR Discussion Papers 8361, C.E.P.R. Discussion Papers.
    6. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
    7. Carlos Garriga & Rodolfo E. Manuelli & Adrian Peralta-Alva, 2012. "A model of price swings in the housing market," Working Papers 2012-022, Federal Reserve Bank of St. Louis.
    8. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2013. "A Dynamic Model Of Housing Demand: Estimation And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 409-442, May.
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    Cited by:

    1. Díaz, Antonia & Franjo, Luis, 2016. "Capital goods, measured TFP and growth: The case of Spain," European Economic Review, Elsevier, vol. 83(C), pages 19-39.

    More about this item

    Keywords

    Current account; housing prices; debt; non-housing consumption; home-ownership; collateralized borrowing constraints.;

    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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