Johns Hopkins professor: Tremors in housing market pose threat to emerging economies

by MPA27 Mar 2015
Researchers at Johns Hopkins Carey Business School have recently found that Researchers at Johns Hopkins Carey Business School have recently found that the ups and downs in the housing market are very different for advanced economies compared to emerging ones—an important insight as the U.S. Federal Reserve considers raising interest rates for the first time since 2008.
Professor Alessandro Rebucci and his colleagues have done research that has led them to write an article titled “Global Liquidity, House prices, and the Macroeconomy: Evidence from Advanced and Emerging Market Economies,” featured in the Journal of Money, Credit and Banking.
Rebucci has found that many economies have experienced housing-based financial collapses similar to the recent U.S. crisis but little to no data existed on the house prices in those countries. Rebucci stated that economists have failed to meaningfully compare the crises or information that might help buffer future downturns.
The researchers completed a list of tasks with new data of house prices from 1970-2012 in 57 nations that represent more than 95% of the world’s Gross Domestic Product.
First, they compared how housing prices behaved in emerging markets and in advanced markets. They found that prices in emerging markets varied over time, a larger source of instability to their economies.
Then the researchers measured their data against financial conditions outside the nations’ own economies to learn what created instability. It was found that external disturbances affect housing prices and consumption two to three times more in emerging economies than advanced economies.
Finally, the researches wanted to try and understand why emerging and advanced economies were so differently affected by outside forces, according to Johns Hopkins.
According to an article released by The Hub, “They discovered that this external force has a large impact in both advanced and emerging economies but operates through different pathways. In emerging economies, the impact occurs through changes in exchange rates, while in advanced economies it moves mainly through domestic channels.”
Throughout history it has been shown that large shifts in international financial conditions drain money from smaller economies. If problems develop, they are more than likely to spill over into larger economies. Finances of most economies in the world have become more and more intermingled.
"If a few emerging economies go down, that will put a drag on the U.S.," Rebucci said. "Mexico is the second-largest trading partner of the U.S. If it runs into trouble, unlike 1994 our border states will feel the pain. If emerging Europe has a problem, it will complicate further the European situation and eventually will come back to haunt the U.S. A crisis in a large collection of interconnected small economies will be as bad as one in a very large business partner."