Housing is the Business Cycle
74 Pages Posted: 24 Sep 2007 Last revised: 11 Sep 2022
Date Written: September 2007
Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor's output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Lessons from the Subprime Meltdown
Monetary Policy Transmission Through the Consumption-Wealth Channel
By Charles Steindel, Martin Lettau, ...
The Economic Contributions of Hyman Minsky: Varieties of Capitalism and Institutional Reform
The Option Value of Non-Recourse Lending and Inflated Asset Prices
By Andrey D. Pavlov and Susan M. Wachter
Money Manager Capitalism and the Global Financial Crisis
Minsky's Approach to Employment Policy and Poverty: Employer of Last Resort and the War on Poverty
Real Time Estimation in Local Polynomial Regression, with Application to Trend-Cycle Analysis
By Tommaso Proietti and Alessandra Luati
Climate Change: A Root of Armed Conflict