Financial Frictions, the Housing Market, and Unemployment

RePEc Short ID: ppe260
ORCID iD: 0000-0002-2216-110X

Branch, William A.; Petrosky-Nadeau, Nicolas; Rocheteau, Guillaume

doi:10.24148/wp2014-26

Working Paper

Financial Frictions, the Housing Market, and Unemployment

Abstract: 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 finance idiosyncratic consumption opportunities. A financial 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 firms? market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996-2010.

Keywords: credit; unemployment; limited commitment; liquidity;

JEL Classification: D82; D83; E40; E50;

https://doi.org/10.24148/wp2014-26