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International interest rates, the current account and housing markets

Luis Franjo ()

Economic Modelling, 2018, vol. 75, issue C, 268-280

Abstract: Current account deficits and housing prices showed a strong positive correlation throughout the mid-90s to 2007. This paper studies the effect of a decrease in the international interest rate and in the downpayment requirement to buy a house on the joint behavior of the current account and housing prices. To this end, I build an open economy model with life-cycle heterogeneous agents, tradable goods and housing. I calibrate the model to the U.S. economy and compute the transition after a decrease in the interest rate and in the downpayment. The model is able to match the boom and (qualitatively) the cooling down in the housing market without a reversal in the interest rate, the increase in the homeownership rate, the simultaneous boom followed by a decline in non-housing consumption, and the emergence of a negative net foreign asset position.

Keywords: Current account; Housing prices; Non-housing consumption; Homeownership; Collateralized borrowing constraints (search for similar items in EconPapers)
JEL-codes: E21 F41 G11 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ecmode:v:75:y:2018:i:c:p:268-280