Housing Dynamics over the Business Cycle
Over the U.S. business cycle, fluctuations in residential investment are well known to systematically lead GDP. These dynamics are documented here to be specific to the U.S. and Canada. In other developed economies residential investment is broadly coincident with GDP. Nonresidential investment has the opposite dynamics, being coincident with or lagging GDP. These observations are in sharp contrast with the properties of nearly all business cycle models with disaggregated investment. Including mortgages and interest rate dynamics aligns the theory more closely with U.S. observations. Longer time to build in housing construction makes residential investment coincident with output.
We thank Carlos Garriga, Martin Gervais, Paul Gomme, Peter Phillips, and Don Schlagenhauf for invaluable discussions and seminar participants at Birkbeck, Cal Poly, Cleveland Fed, Concordia, Glasgow, Edinburgh, NYU Stern, Sogang, UCSB, and Yonsei, as well as workshop and conference participants at Nottingham, Regensburg, Sciences Po, SED in Cyprus, Southampton, and St. Louis Fed for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Finn E. Kydland & Peter Rupert & Roman Šustek, 2016. "HOUSING DYNAMICS OVER THE BUSINESS CYCLE," International Economic Review, vol 57(4), pages 1149-1177. citation courtesy of