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House Prices, Collateral Effects and Sectoral Output Dynamics in Emerging Market Economies

Author

Listed:
  • Berrak Bahadir

    (Department of Economics, Florida International University)

  • Inci Gumus

    (Faculty of Arts and Social Sciences, Sabanci University)

Abstract

This paper studies the channels through which house prices affect sectoral output in emerging market economies, focusing on the role of collateral and borrowing dynamics. We first show that relative to the tradable sector, nontradable sector output is more strongly correlated with house prices and its response to a house price shock in a Panel VAR is larger for a sample of emerging market economies. Then, we study the model dynamics generated by shocks to housing demand in a two-sector small open economy real business cycle model. The results show that housing demand shocks lead to a sectoral reallocation by inducing an expansion in the nontradable sector and a contraction in the tradable sector. The model successfully generates the comovement between the cycle and house prices, matching the strong positive correlation of house prices and nontradable output. We also study the importance of collateral effects for the model dynamics and show that the collateral channel is key to generating the correlations between house prices and sectoral output observed in the data.

Suggested Citation

  • Berrak Bahadir & Inci Gumus, 2021. "House Prices, Collateral Effects and Sectoral Output Dynamics in Emerging Market Economies," Working Papers 2105, Florida International University, Department of Economics.
    • Handle: RePEc:fiu:wpaper:2105
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    File URL: https://economics.fiu.edu/research/pdfs/2021_working_papers/2105.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    House Prices; Collateral Effects; Housing Demand Shocks; Sectoral Output;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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