Financial frictions, the housing market, and unemployment

We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to …nance idiosyncratic consumption opportunities. A …nancial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on …rms’market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor ‡ows, and unemployment rate changes over 1996-2010. JEL Classi…cation: D82, D83, E40, E50 Keywords: credit, unemployment, limited commitment, liquidity. This paper has bene…ted from useful discussions with Aleksander Berentsen, Allen Head, and Murat Tasci. We also thank for their comments seminar participants at the Bank of Canada, at the universities of Basel, Bern, California at Irvine, Hawaii at Manoa, Carleton the 2012 cycles, adjustment, and policy conference on credit, unemployment, supply and demand, and frictions, and the 2014 Workshop on Expectations in Dynamic Macroeconomics at the Bank of Finland. These views are those of the authors and do not necessarily re‡ect the views of the Federal Reserve System. yCorresponding author: e-mail [email protected]; phone 1-949-824-4221; fax 1-949-824-2182