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.
Rocheteau, Guillaume, Nicolas Petrosky-Nadeau, and William A. Branch. 2014. “Financial Frictions, the Housing Market, and Unemployment,” Federal Reserve Bank of San Francisco Working Paper 2014-26. Available at https://doi.org/10.24148/wp2014-26