Unemployment, Financial Frictions, and the Housing Market
Carnegie Mellon University - David A. Tepper School of Business
University of California, Irvine; Federal Reserve Banks - Federal Reserve Bank of Cleveland
March 21, 2013
We develop and calibrate a two-sector, search-matching model of the labor market augmented to incorporate a housing market and a frictional goods market. The labor market is divided into a construction sector and a non-housing sector, and there is perfect mobility of unemployed workers across sectors. In the frictional goods market households, who lack commitment, finance random consumption opportunities with home equity loans. The model can generate multiple steady-state equilibria across which housing prices are negatively correlated with unemployment. Relaxing lending standards typically reduces unemployment, but it can have non-monotonic effects on housing prices and supply. It also leads to a reallocation of workers across sectors, the direction of which depends on firm's market power in the goods market. Quantitatively, we find that innovations that generate an increase in home equity-based borrowing of the same magnitude as the one observed during the 90's explain a reduction in the steady-state unemployment rate between 1/2 and 1 percentage point depending on the calibration strategy.
Number of Pages in PDF File: 66
Keywords: D82, D83, E40, E50
JEL Classification: credit, unemployment, housing, limited commitment, liquidityworking papers series
Date posted: March 24, 2013 ; Last revised: April 12, 2013
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