Journal of Real Estate Finance and Economics, 27:3, 335±354, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Residential Fixed Investment and the Macroeconomy:
Has Deregulation Altered Key Relationships?
Department of Economics, 526 Stokely Management Center, The University of Tennessee, Knoxville,
TRICIA COXWELL SNYDER
Department of Economics and Finance, William Paterson University, P.O. Box 920, Wayne, NJ 07474, USA
Financial deregulation in 1980 potentially altered key relationships between residential ®xed investment (RFI)
and key macroeconomic variables. This study uses a vector error correction model to examine relationships
between RFI, money, interest rates, and output in pre-deregulation and post-deregulation sub-periods. Results
indicate short-term interest rate shocks account for much of RFI variability pre-deregulation. After deregulation,
long-term FHA interest rate shocks better account for RFI movements. Results also show that, in the post-
deregulation era, RFI shocks have increased predictive power for overall gross domestic product movements.
Thus, the study ®nds altered relationships between RFI and macroeconomic variables.
Key Words: residential investment, deregulation, monetary policy
The investment sector is seen as generally important in the macroeconomy. The measure
of investment most commonly used in both theoretical and empirical studies has been
aggregate investment or business ®xed investment (BFI). Empirical work frequently
makes no distinction among various types of investment and their differing behaviors,
with regard to interest rates or real income impacts. However, some prior evidence
indicates that residential ®xed investment (RFI) and business investment behave
differently over the business cycle.
Business ®xed investment appears to respond to ¯uctuations in overall economic
activity. Residential investment movements typically lead movements in other sectors and
the overall economy. In seven of the nine recessions since World War II, RFI led the
decline in BFI, consumption, and real gross domestic product (GDP) by at least two
quarters. In the 1980 recession, for example, RFI led by four quarters the downturn in the
overall economy, while sectors such as consumption and BFI lagged two quarters behind.
Recently, Green (1997), Coxwell (2000), and Coulson and Kim (2000) examined the
components of GDP in predicting changes in business cycles. These studies all found that
shocks to RFI lead changes in the overall economy, while GDP leads changes in BFI.