Us Bilateral Capital Inflows and Housing Price Return

Over the first two decades of the 21st century, there has been a high correlation between balance of payment measures and housing price indexes. The international finance theory has focused on determining the cause of this relationship. The theory has found that deregulation in credit markets, accommodative US monetary policy, and fixed exchange rate regimes caused US housing prices and balance of payments measures to move together. This has pointed to a group of economies/regions where capital flows would more important in determining housing price returns. In 2015, BEA released new estimates of balance of payments measures in line with international standards, such that now bilateral financial account data have been created. In this study, I use regional aggregate bilateral financial account data to forecast US housing prices. Using out-of-sample forecasting techniques, I find that capital inflows from Latin America are able to produce improved forecasts of greater than 30 percent compared to an autoregressive model