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Unemployment, Financial Frictions, and the Housing Market

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  • Nicolas Petrosky-Nadeau
  • Guillaume Rocheteau

Abstract

We develop and calibrate a two-sector, search-matching model of the labor market augmented to incorporate a housing market and a frictional goods market. The labor market is divided into a construction sector and a non-housing sector, and there is perfect mobility of unemployed workers across sectors. In the frictional goods market households, who lack commitment, finance random consumption opportunities with home equity loans. The model can generate multiple steady-state equilibria across which housing prices are negatively correlated with unemployment. Relaxing lending standards typically reduces unemployment, but it can have non-monotonic effects on housing prices and supply. It also leads to a reallocation of workers across sectors, the direction of which depends on firms' market power in the goods market. Quantitatively, we find that innovations or regulations that affect household finance can have a sizeable effect on steady-state unemployment but only a modest effect on housing prices.

Suggested Citation

  • Nicolas Petrosky-Nadeau & Guillaume Rocheteau, "undated". "Unemployment, Financial Frictions, and the Housing Market," GSIA Working Papers 2013-E4, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:205368639
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    Cited by:

    1. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    2. Trejos, Alberto & Wright, Randall, 2016. "Search-based models of money and finance: An integrated approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 10-31.
    3. Michael Lim, "undated". "Relative Prices in a Frictional Labor Market," GSIA Working Papers 2014-E22, Carnegie Mellon University, Tepper School of Business.

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