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House Prices Drive Current Accounts: Evidence from Property Tax Variations

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  • Geerolf, François
  • Grjebine, Thomas

Abstract

We study the causal link between house prices and current accounts. Across time and countries, we find a very large and significant impact of house prices on current accounts. In order to rule out endogeneity concerns, we instrument house prices for a panel of countries, using property tax variations. A 10% instrumented appreciation in house prices leads to a deterioration in the current account of 1.7% of GDP. These results are very robust to the inclusion of the determinants of current accounts. Following a house price increase, private savings decrease, through wealth effects rather than consumer-finance based mechanisms, while non-residential investment rises through a relaxation of financing constraints for firms.

Suggested Citation

  • Geerolf, François & Grjebine, Thomas, 2013. "House Prices Drive Current Accounts: Evidence from Property Tax Variations," CEPREMAP Working Papers (Docweb) 1315, CEPREMAP.
  • Handle: RePEc:cpm:docweb:1315
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    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. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
    3. Emmanuel Farhi & Jean Tirole, 2012. "Bubbly Liquidity," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 678-706.
    4. David Laibson & Johanna Mollerstrom, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Economic Journal, Royal Economic Society, vol. 120(544), pages 354-374, May.
    5. Uhlig, H.F.H.V.S. & Ravn, M., 1997. "On Adjusting the H-P Filter for the Frequency of Observations," Discussion Paper 1997-50, Tilburg University, Center for Economic Research.
    6. University of Chicago & Pedro Gete, 2009. "Housing Markets and Current Account Dynamics," 2009 Meeting Papers 427, Society for Economic Dynamics.
    7. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2010. "Asset prices, exchange rates and the current account," European Economic Review, Elsevier, vol. 54(5), pages 643-658, July.
    8. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters,in: Housing and the Financial Crisis, pages 235-299 National Bureau of Economic Research, Inc.
    9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    10. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
    11. Fratzscher, Marcel & Straub, Roland, 2010. "Asset Prices, News Shocks and the Current Account," CEPR Discussion Papers 8080, C.E.P.R. Discussion Papers.
    12. Andrea Ferrero, 2015. "House Price Booms, Current Account Deficits, and Low Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 261-293, March.
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    Cited by:

    1. Sophie Piton, 2018. "Do Unit Labor Costs Matter? A Decomposition Exercise on European Data," Working Papers 2018-07, CEPII research center.
    2. Sophie Piton, 2017. "Economic Integration and the Non-tradable Sector: The European Experience," 2017 Papers ppi361, Job Market Papers.
    3. Sophie Piton, 2018. "Do Unit Labor Costs Matter? A Decomposition Exercise on European Data," Working Papers 2018-07, CEPII research center.
    4. repec:eee:jhouse:v:38:y:2017:i:c:p:38-49 is not listed on IDEAS
    5. E. Monnet & C. Wolf, 2016. "Demographic Cycle, Migration and Housing Investment: a Causal Examination," Working papers 591, Banque de France.
    6. François Geerolf & Thomas Grjebine, 2014. "Assessing House Price Effects on Unemployment Dynamics," Working Papers 2014-25, CEPII research center.
    7. Joshua Aizenman & Yin-Wong Cheung & Hiro Ito, 2016. "The Interest Rate Effect on Private Saving: Alternative Perspectives," NBER Working Papers 22872, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    current accounts;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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