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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.

Suggested Citation

  • Andrea Ferrero, 2011. "House Prices Booms and Current Account Deficits," 2011 Meeting Papers 1386, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1386

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    References listed on IDEAS

    1. 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.
    2. 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.
    3. University of Chicago & Pedro Gete, 2009. "Housing Markets and Current Account Dynamics," 2009 Meeting Papers 427, Society for Economic Dynamics.
    4. Jordi Galí & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1, January.
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    Cited by:

    1. Pei Kuang, 2013. "Imperfect Knowledge about Asset Prices and Credit Cycles," Discussion Papers 13-02, Department of Economics, University of Birmingham.
    2. Aizenman, Joshua & Jinjarak, Yothin, 2014. "Real estate valuation, current account and credit growth patterns, before and after the 2008–9 crisis," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 249-270.
    3. 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.
    4. Pei Kuang, 2013. "Imperfect Knowledge About Asset Prices and Credit Cycles," Discussion Papers 13-02r, Department of Economics, University of Birmingham.
    5. Tomasz Wieladek & Sergi Lanau, 2012. "Financial Regulation and the Current Account," IMF Working Papers 12/98, International Monetary Fund.
    6. Pei Kuang, 2013. "Imperfect Knowledge about Asset Prices and Credit Cycles," CDMA Working Paper Series 201303, Centre for Dynamic Macroeconomic Analysis.

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