The Driving Force Behind the Boom and Bust in Construction in Europe

37 Pages Posted: 11 Sep 2013

See all articles by Yan Sun

Yan Sun

International Monetary Fund (IMF) - Western Hemisphere Department

Pritha Mitra

International Monetary Fund (IMF)

Alejandro S. Simone

International Monetary Fund (IMF)

Date Written: August 2013

Abstract

This paper studies the factors behind pro-cyclical but widely varying construction shares (as a percent of GDP) across countries, with a strong focus on European countries. Using a dataset covering 48 countries (including advanced and emerging economies within and outside Europe) for 1990-2011, we find that country’s geography, demographics, and economic conditions are the key determinants of a norm around which actual construction shares revolve in a simple AR(1) and error-correction process. The empirical results show that in many European countries, construction shares overshoot relative to their norms before the recent global crisis, but they have fallen significantly since the crisis. Nevertheless, there is still room for further adjustment in construction shares in some countries which may weigh on economic recovery.

Keywords: Infrastructure, Europe, Euro Area, Housing, Tourism, Economic conditions, Demand, Business cycles, Developed countries, Developing countries, Cross country analysis, Construction, Error-correction, European Growth, expenditure, stock market, capital expenditure, stock market index, bond, stock market volatility

JEL Classification: E01, E23, E32, L74, N64

Suggested Citation

Sun, Yan and Mitra, Pritha and Simone, Alejandro S., The Driving Force Behind the Boom and Bust in Construction in Europe (August 2013). IMF Working Paper No. 13/181. Available at SSRN: https://ssrn.com/abstract=2324176

Yan Sun

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Pritha Mitra

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Alejandro S. Simone

International Monetary Fund (IMF) ( email )

700 19th Street, NW
Washington, DC 20431
United States

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