Housing markets and current account dynamics

This dissertation makes two contributions. First, I show that increases in the demand for nontradables may imply trade deficits. Countries import tradables goods during periods when more domestic labor is devoted to produce nontradables to smooth consumption between tradables and nontradables. I focus on housing that I model as a durable and nontradable good. I show that shocks to the demand for housing generate trade deficits without need of the standard ingredients used by others (housing wealth effects or trade in capital goods). In the model housing booms are larger if the country can run a trade deficit because the deficit lowers the opportunity cost of building (which is the foregone consumption of tradable goods due to reallocation of labor to the construction sector). Second, I provide evidence that demand shocks for housing relative to tradable goods help to explain recent global imbalances. I provide four types of evidence: (1) Over the last decade housing variables have decoupled from the business cycle while durable and total consumption expenditures have not, what suggests housing specific shocks. (2) For the same period there has been a strong cross-country correlation between housing variables and current account dynamics. (3) In a parameterized version of the model, housing demand shocks that match the cross-country dynamics of employment in construction generate current account dynamics matching recent global imbalances. (4) I use sign restrictions implied by the model to estimate a vector autoregression and identify the effects of housing shocks on the U.S. trade deficit. The results suggest that housing shocks are an important driving force of current account dynamics.