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Housing Dynamics

  • Roman Sustek

    (Bank of England)

  • Peter Rupert

    (University of California, Santa Barbara)

  • Finn Kydland

Over the U.S. business cycle, fluctuations in residential investment systematically lead fluctuations in real GDP. Evidently, these dynamics are specific to the U.S. and Canada. In other developed economies residential investment tends to be coincident with the cycle. On the other hand, in all countries considered, nonresidential investment is either coincident with or lags GDP. These observations are in sharp contrast with the predictions of nearly all business cycle models once investment is disaggregated. In such models, residential investment lags while nonresidential investment leads output. We ask to what extent differences in financing arrangements, namely fixed vs. variable rate mortgages, have in explaining the lead-lag pattern of investment. We show that including mortgage financing costs aligns the theory more closely with the data.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 315.

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Date of creation: 2012
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Handle: RePEc:red:sed012:315
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