Internal Devaluation and Macroeconomic Adjustment: Lessons from the Great Recession in the US

This paper carries out a systematic reconsideration of the evidence on price, wage and employment adjustment in response to the housing price cycle during the Great Recession across US jurisdictions -- i.e., US Metropolitan Statistical Areas (henceforth MSAs). It offers an insightful decomposition of relative price adjustment by sectors, and relates it to determinants in terms of relative sectoral wages (cost) and employment (slack) dynamics. Over the period 2008-2013, asymmetric housing price shocks were virtually uncorrelated with price and wage inflation across MSAs, while they significantly affected output, income and employment in services, the retail sector and construction. Decomposing the response of relative price inflation into that of goods and services (ex-rents) shows that the relative price of consumption goods fell with housing prices, while the relative price of services increased, with roughly identical elasticities basically offsetting the effect of each other movements.