Causality, real estate prices, and the current account

This paper explores the causal relations between real estate prices and the current account using recently developed econometric methods for recursive systems. Using a variety of high-quality real estate indices, we find little evidence that current account deficits (capital account surpluses) directly drove real estate prices in the United States, Spain, and Ireland. There is some evidence for this linkage in England; however it is transitory and not persistent. There is also strong evidence that current account surpluses have direct impacts on mortgage rates in the United States, providing an indirect channel for stimulating the real estate market mediated through the financial markets.