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Housing and the Business Cycle

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Abstract

In the United States, the percentage standard deviation of residential investment is more than twice that of non-residential investment. GDP, consumption, and both types of investment all co-move positively. At the industry level, output and hours worked in construction are more than three times as volatile as in services, and output and hours co-move positively across sectors. We reproduce all these facts in a multi-sector growth model with the following characteristics: different final goods are produced using different proportions of the same set of intermediate inputs, construction is relatively labor intensive, residential investment is relatively construction intensive, and housing depreciates much more slowly than business capital. Previous empirical work exploring the determinants of residential investment is re-examined in light of the models equilibrium relationship between residential investment, house prices, and the rental rate on capital.

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  • Jonathan Heathcote, 2003. "Housing and the Business Cycle," Working Papers gueconwpa~03-03-21, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~03-03-21
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    More about this item

    Keywords

    Residential investment; House prices; Multi-sector models;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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