Essays on Housing Collateral and Macroeconomic

This thesis examines the role of housing as collateral and occupational choices in aggregate economies. Chapter 1 studies the impact of house price fluctuations on small businesses. The unprecedented upheavals in the U.S. housing market since 2000 and corresponding oscillations in home equity values profoundly affected the net worth and borrowing capacities of individual households. I develop a quantitative model where changes in house prices influence households' borrowing capacities, which in turn influence the entry-exit and expansion-contraction decisions of small business owners. I show that the housing collateral effect can explain the empirically observed strong correlation between house prices and small business activities (as measured by the number of businesses and the number of employees in the small business sector). Next, I conduct an experiment to measure how much of the shrinkage in small business activities during the recent recession can be explained by the housing collateral effect. I argue that the decrease in the value of housing as collateral, following the housing market crash in 2007, can account for 53 percent of the decrease in the number of small businesses and 98 percent of the decrease in the level of small business employment.;In Chapter 2, I present an occupational choice model which emphasizes the use of housing as collateral and apply the model to examine the magnitude of the effect of a housing boom on economic growth in countries at different stages of financial development. The model results are twofold. First, a housing boom mitigates capital misallocation which results from an incomplete financial system, by expanding a business owner's borrowing capacity through an increase in collateral value, and thus boosts economy. Second, the impact of a housing boom is greater in countries with less developed financial systems. I provide empirical evidence to support the model results. To get around an endogeneity issue regarding housing booms (whether housing booms boost economy through increases in collateral value or some other third factor boosts economy and thereby increases house prices), I focus on an essential difference between financial institutions (banks) and financial markets (stock markets): only the former requires the provision of collateral in credit transactions. I use two sets of indicators -- one for financial institutions and the other for financial markets -- to proxy the level of financial development. The analysis of 23 housing boom episodes in 55 countries from 1997 to 2012 reveals that economic growth and financial development are inversely related when the level of financial development is measured by financial institutions, but unrelated when the level of financial development is measured by financial markets. The collateral impact of a housing boom also turns out to be greater in countries whose economies rely more on small firms. Both these empirical findings are in favor of the model results.