Financial Frictions, the Housing Market, and Unemployment

Abstract

We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms' market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor áows, and unemployment rate changes over 1996-2010.

Keywords: credit, unemployment, housing, limited commitment, liquidity

JEL Classification: D82, D83, E40, E50