Template-Type: ReDIF-Paper 1.0
Author-Name: Luis Franjo
Author-X-Name-First: Luis
Author-X-Name-Last: Franjo
Author-Email: luis.franjo@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Title: International Interest Rates and Housing Markets
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.
Length: 47 pages		
Creation-Date: 2015-02
Revision-Date: 2015-02
Publication-Status: 
File-URL: http://infoscience.epfl.ch/record/205145/files/CFP2015_01.pdf
Number:
Classification-JEL: E21, F41, G11
Keywords: Current account, housing prices, debt, non-housing consumption, home-ownership, collateralized borrowing constraints.
Handle: RePEc:cif:wpaper:201501