Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212204 
Year of Publication: 
2012
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 1/2012
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper presents a two-sector, two-country model showing that inflation in the housing market, a low personal savings rate, and a construction investment boom can contribute to a large current account de cit. In the model, demand by a group of households in the domestic country is constrained by the availability of collateral. This implies more procyclical debt capacity because constrained households can borrow against the increase in the value of their houses during an expansion. A higher degree of financial liberalization and development helps constrained households reach higher loan-to-value ratios, thus relaxing their borrowing constraints. The resulting higher net worth and lower need for savings imply a worsening current account.
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-784-9
Document Type: 
Working Paper

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