Working Paper No. 569
By Gabor Pinter
What explains the strong comovement between house prices and job losses over the UK business cycle? To study this question, I build a general equilibrium model with collateral constraints, endogenous job separation and housing shocks, and confront it with macroeconomic data via Bayesian methods. The results suggest that shocks to house prices (i) explain about 10-20% of output fluctuations and about 20%–30% of fluctuations in unemployment and job separation rates via the collateral channel, and (ii) were a major cause in triggering the 1990 and 2008 recessions in the United Kingdom.
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