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Housing Markets and Current Account Dynamics

  • Gete, Pedro
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    This paper makes a theoretical and an empirical contribution to the debate on what caused the "global imbalances". On the empirical side, I provide different types of evidence to support that housing demand shocks (shocks to the aggregate marginal rate of substitution between housing and tradables) help to explain the global imbalances. On the theory side, I show that shocks to the demand for housing generate trade deficits without need for the standard ingredients used by others to model housing (wealth effects or trade in capital goods). I model housing as a durable and nontradable good. Countries import tradable goods during periods when more domestic labor is devoted to produce nontradables to smooth consumption between tradables and nontradables. Housing booms are larger if the country can run a trade deficit because the deficit lowers the opportunity cost of building, which is the foregone consumption of tradable goods due to reallocation of labor to the construction sector. Concerning the empirical evidence, I first document that over the last decade there has been a strong cross-country correlation between housing variables and current account dynamics. Second, I show that using the cross-country dynamics of employment in construction as the explanatory variable, the model generates current account dynamics matching recent global imbalances. Finally, I use sign restrictions implied by the model to estimate a vector autoregression and identify the effects of housing demand shocks on the U.S. trade deficit. The results suggest that housing shocks matter for current account dynamics.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20957.

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    Date of creation: Jun 2009
    Date of revision: 24 Feb 2010
    Handle: RePEc:pra:mprapa:20957
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    1. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
    2. Buiter, Willem H., 2009. "Housing wealth isn't wealth," Economics Discussion Papers 2009-56, Kiel Institute for the World Economy.
    3. Edward E. Leamer, 2007. "Housing IS the Business Cycle," NBER Working Papers 13428, National Bureau of Economic Research, Inc.
    4. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
    5. repec:oup:qjecon:v:115:y:2000:i:1:p:147-180 is not listed on IDEAS
    6. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers 660, Board of Governors of the Federal Reserve System (U.S.).
    7. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
    8. John N. Muellbauer, 2007. "Housing, credit and consumer expenditure," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 267- 334.
    9. Juan Francisco Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2005. "Markov-switching structural vector autoregressions: theory and application," FRB Atlanta Working Paper 2005-27, Federal Reserve Bank of Atlanta.
    10. Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco.
    11. Ariel Burstein & Joao C. Neves & Sergio Rebelo, 2004. "Investment Prices and Exchange Rates: Some Basic Facts," NBER Working Papers 10238, National Bureau of Economic Research, Inc.
    12. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2010. "Winners and Losers in House Markets," Working Papers 2010-5, Central Bank of Cyprus.
    13. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
    14. Dedola, Luca & Neri, Stefano, 2004. "What Does A Technology Shock Do? A VAR Analysis with Model-based Sign Restrictions," CEPR Discussion Papers 4537, C.E.P.R. Discussion Papers.
    15. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-93, March.
    16. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
    17. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2007. " Winners and Losers in Housing Markets," CDMA Conference Paper Series 0705, Centre for Dynamic Macroeconomic Analysis.
    18. Erceg, Christopher & Levin, Andrew, 2006. "Optimal monetary policy with durable consumption goods," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1341-1359, October.
    19. Joseph Gruber & Steven Kamin, 2009. "Do Differences in Financial Development Explain the Global Pattern of Current Account Imbalances?," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 667-688, 09.
    20. Matsuyama, Kiminori, 1990. "Residential investment and the current account," Journal of International Economics, Elsevier, vol. 28(1-2), pages 137-153, February.
    21. Pau Rabanal & Oriol Aspachs-Bracons, 2009. "The Drivers of Housing Cycles in Spain," IMF Working Papers 09/203, International Monetary Fund.
    22. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
    23. Bems, Rudolfs & Dedola, Luca & Smets, Frank, 2007. "US imbalances: The role of technology and policy," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 523-545, June.
    24. James A. Kahn, 2008. "What drives housing prices?," Staff Reports 345, Federal Reserve Bank of New York.
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