House Price Booms, Current Account Deficits, and Low Interest Rates

Financial deregulation can help rationalize the negative correlation between house prices and current account balance observed in the United States and in several other countries that have experienced the highest degree of turmoil during the recent financial crisis. Lower collateral requirements facilitate access to external funding and increase the demand for consumption and housing. As a consequence, house prices increase and the current account turns negative because households borrow on net from the rest of the world. At the same time, however, the world real interest rate counterfactually raises. Expansionary monetary policy shocks in the United States, amplified by exchange rate pegs to the dollar in emerging economies, keep the world real interest rate low but play virtually no role for house prices and the current account.