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Labor Market Search, Housing Prices and Borrowing Constraints

  • Javier Andrés Domingo

    ()

    (University of Valencia, Spain)

  • José Emilio Boscá

    ()

    (University of Valencia, Spain)

  • Javier Ferri

    ()

    (University of Valencia, Spain)

Mortgage market deregulation in the early 1980s coincided in time with a sharp break in the cyclical behavior of many variables related to housing and to the labor market. This paper analyses the joint dynamics of labor market variables, output and housing prices in a search model with efficient bargaining and financial frictions. In a setting of household heterogeneity, only mortgaged-backed loans are available for impatient households, whose borrowing cannot exceed a proportion of the expected value of their real estate holdings. This feature of the credit market, together with search and matching frictions in the labor market, establish a strong link between credit constraints and consumption that significantly affects labor market outcomes: hours, wages and vacancies. The model is also able to explain the comovements of housing prices with output, productive investment and consumption. Our analysis confirms that the response of labor market variables to technology shocks has been substantially affected by the changes in the nature and tightness of imperfections in credit markets that occurred in the early 1980s. Allowing for a housing price shock, in addition to the technology shock, the model is also able to explain the observed reduction in the correlation of housing prices with both output and private investment.

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File URL: http://iei.uv.es/docs/wp_internos/RePEc/pdf/iei_1001.pdf
File Function: First version, 2010
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Paper provided by International Economics Institute, University of Valencia in its series Working Papers with number 1001.

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Length: 35 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:iei:wpaper:1001
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