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Unemployment and house price crises: Lessons for Fiscal Policy from the Dutch Recession


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Authors

Teulings, CN 

Abstract

Since the beginning of the financial crisis in 2008, the Dutch economy lost 6% of gdp relative to Germany, even though the Netherlands (unlike the GIPSI countries) did not face serious problems to finance its sovereign debt. This bad performance is explained by the interaction of fiscal policy and the housing market. This makes the Netherlands an interesting case because these effects can be analyzed in isolation of stress on financial markets. We sketch a simple overlapping generation framework. House price declines lead to a temporary drop in consumption, forcing a reallocation of labour from domestic to tradable industries. This leads to a loss in industry specific human capital, causing a jump in unemployment. The analysis yields a number of lessons for fiscal policy in the aftermath of a financial crisis and for the current EU framework for the evaluation of member states’ fiscal policy. Fiscal policy provided too little intergenerational insurance and the EU framework is an obstacle to do that.

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Keywords

house price crises, fiscal policy

Journal Title

IZA Journal of European Labor Studies

Conference Name

Journal ISSN

2193-9012
2193-9012

Volume Title

3

Publisher

Springer Science and Business Media LLC