National and International Business Cycle Effects of Housing Crises

Abstract

Housing crises usually go hand in hand with a long-lasting recession and a considerable loss in output. By looking at historical crises, we show that the downturns in the housing markets in the United States, the United Kingdom, Spain, and France, beginning in 2006 and in 2007, were followed by exceptionally strong recessions. Then, we investigate the international transmission effects of housing crises by applying models that stress the importance of the trade channel as a transmission channel. We demonstrate that recessions triggered by housing crises are in general strong enough to lead to significant negative international spillover effects. Further, we show that the housing market downturns in the above four countries are sufficient to explain to a considerable degree the recessions that took place all over the world during the Great Recession of 2008/2009 and in particular in European countries via international spillover effects. However, these housing crises are not sufficient to explain the steep downturn that could be observed in many countries during the winter half year 2008/2009.

JEL Classification: C50, E32, F42