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Household borrowing constraints and residential investment dynamics

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  • Khan, Hashmat
  • Rouillard, Jean-François

Abstract

It is well known that residential investment leads output in the US economy. The main contribution of our paper is to highlight the role of household borrowing constraints in accounting for this fact. We study the role of home-equity loans used to boost consumption as a channel that affects residential investment. We consider a multi-agent model where some home-owning households face borrowing constraints that reflect home-equity loans or refinancing constraints. We show that the severity of the households’ borrowing constraints in an economy can generate this stylized fact of US residential investment dynamics. Interestingly, the model correctly predicts coincident residential investment dynamics in countries with less severe borrowing constraints. This prediction is borne out when the model is calibrated to French data.

Suggested Citation

  • Khan, Hashmat & Rouillard, Jean-François, 2018. "Household borrowing constraints and residential investment dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 1-18.
  • Handle: RePEc:eee:dyncon:v:95:y:2018:i:c:p:1-18
    DOI: 10.1016/j.jedc.2018.07.007
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Household Borrowing Constraints and Residential Investment Dynamics
      by Christian Zimmermann in NEP-DGE blog on 2016-09-15 02:08:01

    Citations

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    Cited by:

    1. Ghoddusi, Hamed & Afkhami, Mohamad, 2019. "Valuation of mortgage interest deductibility under uncertainty: An option pricing approach," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 102-122.
    2. Hashmat Khan & Jean-François Rouillard & Santosh Upadhayaya, 2020. "Consumer Confidence and Household Investment," Cahiers de recherche 20-15, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    3. Joshua Brault & Hashmat Khan, 2020. "The Shifts In Lead‐Lag Properties Of The U.S. Business Cycle," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 319-334, January.
    4. Xiaoqing Zhou, 2022. "Mortgage borrowing and the boom-bust cycle in consumption and residential investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 244-268, April.
    5. Hashmat Khan & Jean-François Rouillard & Santosh Upadhayaya, 2019. "Consumer Confidence and Household Investment," Carleton Economic Papers 19-06, Carleton University, Department of Economics, revised 28 Oct 2020.
    6. Fehrle, Daniel, 2019. "Housing and the business cycle revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 99(C), pages 103-115.
    7. Xiaoqing Zhou, 2022. "Mortgage borrowing and the boom-bust cycle in consumption and residential investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 244-268, April.

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    More about this item

    Keywords

    Home-equity loans; Borrowing constraints; Residential investment; Business cycles;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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