Housing Markets and Current Account Dynamics

Gete, Pedro (2009): Housing Markets and Current Account Dynamics.

Abstract

This paper makes two contributions. On the theory side, I show that increases in the demand for housing may generate trade deficits without need for the standard ingredients used by others to model housing (wealth effects or trade in capital goods). Housing is a durable good that must be locally produced. If the desire to smooth consumption across goods is sufficiently strong, 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. On the empirical side, I provide two types of evidence to support the theory. First, 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. Second, I use sign restrictions implied by the model to estimate a vector autoregression. The results for a sample of OECD economies suggest that housing demand shocks matter for current account dynamics through the channel explained before.

• Item Type: MPRA Paper
• Language: English
• Keywords: Housing, Current Account, Global Imbalances, Sign Restrictions, Two Country Models, Two Sector Models
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; F - International Economics > F3 - International Finance; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates

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