Housing Markets And Current Account Dynamics

This paper makes a theoretical and an empirical contribution to the debate on what caused the "Global imbalances". On the empirical side, the author provides different types of evidence to support that housing demand shocks (shocks to the aggregate marginal rate of substitution between housing and tradables) help to explain the global imbalances. On the theory side, the author shows that shocks to the demand for housing generate trade deficits without need for the standard ingredients used by others to model housing (wealth effects or trade in capital goods). The author models housing as a durable and nontradable good. Countries import tradable goods during periods when more domestic labor is devoted to produce nontradables to smooth consumption between tradables and nontradables.