International Interest Rates and Housing Markets

Luis Franjo

Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne

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 during that period on the joint behavior of the current account and housing prices. To this end, I build a small open economy model with life-cycle heterogeneous agents and two goods: tradable (non-housing) and non-tradable (housing). I calibrate the model to replicate selected aggregate statistics of the U.S. economy and compute the transition after the decrease in the interest rate and in the downpayment. The model is able to match some relevant facts: the boom and the bust (after 2007) in the housing market, where the bust, as the data show, occurs without a reversal in the interest rate; the increase in the homeownership rate; the simultaneous boom - and bust - in non-housing consumption; and the coexistence of borrowing from abroad with a current account deficit throughout the transition.

Keywords: Current account; housing prices; debt; non-housing consumption; home-ownership; collateralized borrowing constraints. (search for similar items in EconPapers)
JEL-codes: E21 F41 G11 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-02, Revised 2015-02
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://infoscience.epfl.ch/record/205145/files/CFP2015_01.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cif:wpaper:201501

Access Statistics for this paper

More papers in Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne Contact information at EDIRC.
Bibliographic data for series maintained by Corinne Dubois ( this e-mail address is bad, please contact ).