Impact of Fiscal Policy on Residential Investment in France

Abstract

The present paper assesses the impact of fiscal policy on residential investment in France. The analysis is conducted in the framework of a VECM, since this allows accounting for endogeneity between the variables. Our results imply that a long term relationship between investment and subsidies exists, making subsidies an adequate measure to influence residential investment and hence the business cycle. In addition, a disaggregated approach taking into account several different types of fiscal measures highlights that tax and interest rate subsidies are the most efficient fiscal tool for influencing residential investment. When accounting for financial factors by means of households' borrowing capacity, we find that the latter also impacts residential investment positively. Moreover, this alternative specification underlines the robustness of the above mentioned results, as it confirms subsidies as the most efficient measure to influence residential investment.

Keywords: Fiscal policy, residential investment, VECM

JEL Classification: E62, R21, C22