Abstract
During the process of accession to the Eurozone, some member countries experienced a rapid increase in credit availability fueled by the fast convergence of interest rates. This was accompanied by large current account deficits and booms in the housing sector. This paper argues that these features are intimately related to the fast expansion of the household credit market, namely the financing of housing purchases. A model is presented of a small open economy where the fall of interest rates is associated with an increase in the collateral value of housing, which in turn shifts production towards the housing sector. This also impacts on competitiveness, leading to a deterioration of the trade balance. Similar effects may also imply an asymmetry across member countries in the transmission of monetary policy, depending on how important collateral constraints are in each country.
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