The Drivers of Housing Cycles in Spain

In the last \u85fteen years, Spain has witnessed a large increase in housing prices and in the importance of the housing sector, which has refreshed the debate on the drivers of housing cycles. Since Spain joined the EMU, two main important factors behind the housing boom appear to be the decrease of nominal interest rates due to the disappearance of currency risk premia, and demographic factors related to immigration and changing patterns in household composition. In order to assess the importance of these and other factors, in this paper we estimate a New Keynesian model of a currency area with durable goods, using data for Spain and the rest of the EMU. We \u85nd that parameter estimates are similar to the ones estimated in the literature, in that, in particular, durable goods prices are more exible than nondurable consumption goods. We \u85nd that housing demand and technology shocks are the main driver of the recent housing boom. Finally, we examine the role of di¤erent rigidities suggested in the literature to help the model \u85t the data. We nd that labor market frictions, that in the model imply costly labor reallocation across sectors, are crucial to explain main features of the data. On the other hand, \u85 nancial frictions that impose a collateral constraint on borrowing do not appear to be relevant