Residential Investment and Economic Growth

The causal relationship between growth and fixed capital formation is reexamined. Our findings are in sharp contrast with the earlier findings by Blomstrom et al. (1996) that capital formation does not contribute to economic growth. However, our findings also reject the conventional wisdom represented by De Long and Summers (1991, 1992) that capital formation in the form of business equipment determines the rate of a country¡¯s economic growth. What we have found instead is that capital formation in the residential sector (housing) causes GDP growth, which in turn causes capital formation in the business sector (plant and equipment).