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The US Housing Bust and Soaring Oil Prices: What next for the world economy? CEPS Working Document No. 294/June 2008

Gros, Daniel. and Frale, Cecilia. (2008) The US Housing Bust and Soaring Oil Prices: What next for the world economy? CEPS Working Document No. 294/June 2008. [Working Paper]

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    Abstract

    This paper estimates the impact of the ongoing housing bust and oil price boom on the US and European economies. It finds that large house price movements (changes in construction investment) are useful to predict exceptionally bad and good times for the US economy, but not for most large European countries. In Europe housing market developments have led to extreme values of GDP, mainly in the UK, Spain and some Nordic countries. Exceptionally good or bad times are defined as realisations of the output gap (the difference between actual and trend GDP) that fall in the % tail of the distribution. Our definition of a ‘bad time’ thus does not necessarily imply a recession, which is officially defined as two consecutive quarters of falling GDP (and employment). A prolonged period of sub par growth could also lead to an equivalent output gap. Our model allows us to estimate the probability of the US and European economies experiencing exceptionally bad times. We find that the probability for the US is over 50% if one assumes that house prices will continue to fall throughout 2008. Adding the high oil price to the picture increases this probability to over 80%. For most European countries we find a much lower probability; except for Spain, where the probability of a large output gap will rise to over 85 % by the end of 2008 if house prices were to fall as much as in the US.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > External relations > EU-US
    EU policies and themes > External relations > international economy
    EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    EU policies and themes > Policies & related activities > energy policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Working Documents
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 20 Apr 2009
    Page Range: p. 20
    Last Modified: 06 Apr 2012 12:23
    URI: http://aei.pitt.edu/id/eprint/9318

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