Abstract
Since Spain joined the EMU, two main important factors behind the housing boom appear to be the decrease of nominal interest rates and demographic factors. In this paper we estimate a New Keynesian model of a currency area, using data for Spain and the rest of the EMU to study the importance of those factors. We also examine the role of different rigidities and find that labor market frictions are crucial to explain main features of the data. On the other hand, financial frictions that impose a collateral constraint on borrowing do not appear to be relevant.
Highlights
The origins of the current global crisis are multiple and complex but, undoubtedly, the housing sector has played a central role in its amplification and propagation
As was the case with the Spanish data, the model is able to explain the high volatility of residential investment and housing prices, but it overstates the volatility of consumption growth of nondurable goods
10 We only present this figure to focus the discussion on the housing sector in Spain
Summary
The origins of the current global crisis are multiple and complex but, undoubtedly, the housing sector has played a central role in its amplification and propagation. In a highly influential paper, Iacoviello (2005) extends an otherwise standard DSGE model to allow for durable (housing) consumption In such a model housing plays a double role. To understand the role of declining interest rates, demographic pressures, as well as other factors in explaining the evidence we have just discussed, in this paper we build and estimate a two-country, two-sector model of a currency union, with durable and. Monetary shocks (both in the aggregate of the EMU as well as the declining risk premia in Spain) play a minor role explaining the housing price boom, against the view that the sustained low levels of real interest rates was behind it.
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