Financial Frictions, the Housing Market, and Unemployment

47 Pages Posted: 24 Mar 2013 Last revised: 15 Nov 2014

William Branch

University of California, Irvine - Department of Economics

Nicolas Petrosky-Nadeau

Guillaume Rocheteau

University of California, Irvine; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: November 2014

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

Suggested Citation

Branch, William and Petrosky-Nadeau, Nicolas and Rocheteau, Guillaume, Financial Frictions, the Housing Market, and Unemployment (November 2014). Available at SSRN: https://ssrn.com/abstract=2237525 or http://dx.doi.org/10.2139/ssrn.2237525

William Branch

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States
757-221-2432 (Phone)

Guillaume Rocheteau

University of California, Irvine ( email )

Campus Drive
Irvine, CA 62697-3125
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

No contact information is available for Nicolas Petrosky-Nadeau

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