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House Prices Booms and Current Account Deficits

  • Andrea Ferrero

    (Federal Reserve Bank of New York)

One of the most striking features of the period before the Great Recession of 2007-2009 is the strong positive correlation between house price appreciation and current account deficits in countries that have subsequently experienced the highest degree of financial turmoil. A progressive relaxation of credit constraints can rationalize this empirical observation. Lower collateral requirements facilitate access to external funding and drive up house prices. Households increase their leverage borrowing from the rest of the world so that the current account turns negative. Several pieces of evidence support this view. The paper further compares this mechanism with the role of monetary policy, the exchange rate regime and foreign saving shocks in accounting for the evidence.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1386.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1386
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  1. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  2. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2009. "Asset Prices, Exchange Rates and the Current Account," CEPR Discussion Papers 7614, C.E.P.R. Discussion Papers.
  3. Monacelli, Tommaso, 2006. "New Keynesian Models, Durable Goods and Collateral Constraints," CEPR Discussion Papers 5916, C.E.P.R. Discussion Papers.
  4. Galí, Jordi & Gertler, Mark (ed.), 2010. "International Dimensions of Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226278865.
  5. Andrea Ferrero & Mark Gertler & Lars E. O. Svensson, 2007. "Current Account Dynamics and Monetary Policy," NBER Chapters, in: International Dimensions of Monetary Policy, pages 199-244 National Bureau of Economic Research, Inc.
  6. Matteo Iacoviello & Raoul Minetti, 2002. "Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence," Boston College Working Papers in Economics 538, Boston College Department of Economics.
  7. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2010. "Can Cheap Credit Explain the Housing Boom?," NBER Working Papers 16230, National Bureau of Economic Research, Inc.
  8. Joshua Aizenman & Yothin Jinjarak, 2008. "Current Account Patterns and National Real Estate Markets," NBER Working Papers 13921, National Bureau of Economic Research, Inc.
  9. Joseph Nichols & Anthony Pennington-Cross & Anthony Yezer, 2004. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 197-219, November.
  10. Jordi Galí & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1, October.
  11. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
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