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Housing Markets and Current Account Dynamics

Author

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  • Gete, Pedro

Abstract

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.

Suggested Citation

  • Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
  • Handle: RePEc:pra:mprapa:20957
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    File URL: https://mpra.ub.uni-muenchen.de/25219/1/MPRA_paper_25219.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Housing; Current Account; Global Imbalances; Sign Restrictions; Two Country Models; Two Sector Models;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F3 - International Economics - - International Finance
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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