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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Housing and the Business Cycle
Morris Davis and Jonathan Heathcote

Abstract: In the United States, the percentage standard deviation of residential investment is more than twice that of non-residential investment. In addition, GDP, consumption, and both types of investment co-move positively. We reproduce these facts in a calibrated multi-sector growth model where construction, manufacturing and services are combined, in different proportions, to produce consumption, business investment and residential structures. New housing requires land in addition to new structures. The model can also account for important features of industry-level data. In particular, hours and output in all industries are positively correlated, and are most volatile in construction.

Keywords: Residential investment, co-movement, home production, multisector models

Full paper (566 KB PDF)

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Last update: February 19, 2004