Housing and Endogenous Long-Term Growth

Abstract

In this paper, we develop an endogenous growth model where housing plays a role as a consumption and an investment good for households, as an input to production, and as a production sector. We show that the long-term endogenous growth rate for the economy, while not affected by housing-related preference parameters, depends critically on housing-related production parameters. The key modeling assumption is that housing and other assets in the economy are not perfect substitutes. With this we can show that the endogenous long-term growth rate depends on the relative price of housing and other types of capital. Accordingly, the effects of productivity shocks on growth can be understood through their effects on the relative asset price and the corresponding changes in capital intensity. We show that productivity shocks to the three sectors of production, manufacturing, construction, and educational and training activities, have positive effects on long-term growth. For reasonable parameter values, however, the responsiveness of the long-term growth rate to shocks in construction is greater than responsiveness to shocks in manufacturing.