Why does residential investment lead output in the US and Canada but it is coincident in other industrialized countries? In this paper we explore the role of home-equity loans used to boost consumption as a channel that affects residential investment. Towards this end, we consider a multi-agent real business cycle model augmented with household borrowing constraints that reflect home-equity loans or refinancing constraints. The main contribution of our paper is to highlight that the severity of these borrowing constraints in the economy can generate both stylized facts of residential investment dynamics. In US and Canada, a greater proportion of households rely on home-equity loans relative to other industrialized countries. This difference matters for the distinct residential investment dynamics observed across countries.

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Keywords Home-Equity Loans, Borrowing Constraints, Residential Investment, Business Cycles
JEL Capital; Investment (including Inventories); Capacity (jel E22), Business Fluctuations; Cycles (jel E32), Housing Demand (jel R21), Housing Supply and Markets (jel R31)
Series Carleton Economic Papers (CEP)
Khan, H.U, & Rouillard, Jean François. (2016). Household Borrowing Constraints and Residential Investment Dynamics (No. CEP 16-07). Carleton Economic Papers (CEP).