Research Discussion Papers, Bank of Finland
No 1/2012:
Housing market and current account imbalances in the international economy
Maria Teresa Punzi ()
Abstract: This paper presents a two-sector, two-country model
showing that inflation in the housing market, a low personal savings rate,
and a construction investment boom can contribute to a large current
account deficit. In the model, demand by a group of households in the
domestic country is constrained by the availability of collateral. This
implies more procyclical debt capacity because constrained households can
borrow against the increase in the value of their houses during an
expansion. A higher degree of financial liberalization and development
helps constrained households reach higher loan-to-value ratios, thus
relaxing their borrowing constraints. The resulting higher net worth and
lower need for savings imply a worsening current account.
Keywords: housing market; current account; international economy; (follow links to similar papers)
JEL-Codes: E21; E32; F32; F41; J22; (follow links to similar papers)
21 pages, January 10, 2012
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