Common shocks, divergent consequences: the political economy of housing bubbles.

R/R at Politics and Society (with Alison Johnston)

Analyses in international political economy (IPE) identify interest rate convergence, magnified in the process of European monetary integration, and financial market liberalization as causal factors behind the rise of house prices.  Despite these common credit market supply shocks, OECD countries experienced heterogeneous trends in housing inflation throughout the 1990s and 2000s. Turning towards a political-based labour market explanation of housing prices, we focus on whether wage-setting institutions blunt financial liberalization’s impact on housing inflation via their restraining effect on incomes. Employing both a panel regression analysis and a structured comparison of housing developments in Ireland and the Netherlands, we uncover two findings. First, income growth is a more important predictor of housing bubbles across OECD economies countries than financial variables (although income’s impact on house prices is severely mitigated for the United States).  Second, countries with coordinated labor market institutions that enabled governments to intervene and grant grant political coalitions in the export sector veto powers over the non-tradable sector in wage setting, realized more restrained income growth and, in turn, were less prone to housing bubbles.

» Capital, EMU, Housing Bubbles.pdf (PDF, 1.44 Mb)