Housing and the Great Recession: A VAR Accounting Exercise

22 Pages Posted: 19 Dec 2012

See all articles by Samuel Henly

Samuel Henly


Alexander L. Wolman

Federal Reserve Bank of Richmond

Date Written: January 1, 2011


We use a vector autoregression (VAR) for the components of gross domestic product (GDP) to conduct some sectoral and temporal accounting for the current recession. It is obvious that housing played an important role in the current recession, but residential investment declined for two years before GDP declined. According to the VAR, the level of GDP in the second quarter of 2009 -- the trough of the decline in GDP -- was close to but above the level implied by the estimated sequence of VAR innovations to residential investment over the period 2006:Q1-2009:Q2. Until late 2007 other offsetting shocks kept real GDP growing roughly at trend, but after that the other shocks disappeared or reversed sign. Taking a similar approach with employment, we first observe that, as with output, employment in the housing industry began to fall well before aggregate employment. However, unlike output, the eventual decline in aggregate employment dwarfed the decline in housing-industry employment. The shock to residential construction employment can nonetheless explain a small portion of the current employment shortfall relative to trend.

Suggested Citation

Henly, Samuel and Wolman, Alexander L., Housing and the Great Recession: A VAR Accounting Exercise (January 1, 2011). FRB Richmond Economic Quarterly, vol. 97, no. 1, First Quarter 2011, pp. 45-66. Available at SSRN: https://ssrn.com/abstract=2190606

Samuel Henly


Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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