Working Paper: CEPR ID: DP9729
Authors: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
Abstract: Abstract. We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
Keywords: capital flows; collateral constraints; global imbalances; house prices; household debt
JEL Codes: E21; F32; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Saving Glut (SG) (E21) | Decline in Interest Rates (E43) |
| Decline in Interest Rates (E43) | Increase in Consumption (E21) |
| Decline in Interest Rates (E43) | Increase in Investment (E22) |
| Increase in Consumption (E21) | Increase in House Prices (R31) |
| Increase in Investment (E22) | Increase in House Prices (R31) |
| Saving Glut (SG) (E21) | Increase in Household Debt (G51) |
| Decline in Interest Rates (E43) | Increase in Household Debt (G51) |
| Banking Glut (BG) (F65) | Reduction in Spread between Mortgage Rates and Funding Rates (E43) |
| Reduction in Spread between Mortgage Rates and Funding Rates (E43) | Easing Credit Conditions (E51) |
| Saving Glut (SG) + Banking Glut (BG) (D14) | Increase in House Prices (R31) |
| Saving Glut (SG) + Banking Glut (BG) (D14) | Increase in Household Debt (G51) |