My doctoral dissertation studies the impact of the housing market on determining current account imbalances. In recent years there has been a strong housing market with housing price appreciation and a dramatic increase in the current account deficit in the U.S. and in many industrialized countries.

The underline idea is that an increase in housing prices fuels investment in residential construction and generates a strong wealth effect that results in significant increment in private consumption. Houses are also tangible assets that serve as collateral for loans generating a credit boom with potential effects on global imbalances, since the economy can also borrow from foreign countries.

In the first chapter, I construct a Panel dataset over 10 OECD countries for 1985-2006. Making use of a Panel VAR technique, I estimate a negative relationship between housing prices and the current account for the overall sample. Housing price shocks have a positive impact on investment, consumption and growth, and, as result, the current account deficit, even if the sample includes some countries which are saving and running a current account surplus.

In the second chapter, I develop a two-sector, two-country, DSGE setup to study the interaction between housing prices and the current account. The model finds that housing price increases are driven by aggregate technology shocks and housing preferences shocks. Those shocks stimulate consumption, investment and economic growth, with negative impact in the current account. Amplification of impact results for higher loan-to-value ratio.

While the second chapter focuses on the domestic determinants of increasing current account deficit, the third chapter, co-authored with C. Walker, analyzes the determinants of capital flows into the United States. We analyze bond inflows from 12 separate jurisdictions into the United States over the period 1994-2006 using adjusted U.S. Treasury International Capital Flow (TIC) data. Using different econometric techniques, we find evidence for an impact from interest rate differentials to bond inflows that have increased over time with a reduction in home bias on the part of non-US investors.