Residential Investment & the Business Cycle : International Evidence

Abstract

Generally speaking, economists believe that recessions (a decrease in production or GDP) begin with a slump in investment spending by businesses (e.g. buildings, machinery, equipment), which is why the short-run fluctuations in the economy are referred to as the "business cycle." Previous research for the U.S. finds that spending on residential investment (housing), a subcategory of investment spending, is below normal leading into recessions and, therefore, contributes significant weakness to the growth rate of GDP as the U.S. economy enters a recession. We apply the method of existing studies in order to analyze this relationship at the international level.