Financial Frictions, the Housing Market, and Unemployment
University of California, Irvine - Department of Economics
Carnegie Mellon University - David A. Tepper School of Business; Federal Reserve Banks - Federal Reserve Bank of San Francisco
University of California, Irvine; Federal Reserve Banks - Federal Reserve Bank of Cleveland
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.
Number of Pages in PDF File: 47
Keywords: credit, unemployment, housing, limited commitment, liquidity
JEL Classification: D82, D83, E40, E50
Date posted: March 24, 2013 ; Last revised: November 15, 2014
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