It is well known that residential investment leads output in the US economy. The main contribution of our paper is to highlight the role of household borrowing constraints in accounting for this fact. We study the role of home-equity loans used to boost consumption as a channel that affects residential investment. We consider a multi-agent model where some home-owning households face borrowing constraints that reflect home-equity loans or refinancing constraints. We show that the severity of the households’ borrowing constraints in an economy can generate this stylized fact of US residential investment dynamics. Interestingly, the model correctly predicts coincident residential investment dynamics in countries with less severe borrowing constraints. This prediction is borne out when the model is calibrated to French data.

Additional Metadata
Keywords Borrowing constraints, Business cycles, Home-equity loans, Residential investment
Persistent URL dx.doi.org/10.1016/j.jedc.2018.07.007
Journal Journal of Economic Dynamics and Control
Citation
Khan, H.U, & Rouillard, J.-F. (Jean-François). (2018). Household borrowing constraints and residential investment dynamics. Journal of Economic Dynamics and Control, 95, 1–18. doi:10.1016/j.jedc.2018.07.007