Follow the Leader: How Changes in Residential and Non‐residential Investment Predict Changes in GDP

This paper examines the effect of different kinds of investments on the business cycle. Specifically, it examines whether residential and non‐residential investment Granger cause GDP, and whether GDP Granger causes each of these types of investments. The paper uses quarterly National Income and Products Data for the period 1959 to 1992. Under a wide variety of time‐series specifications, residential investment causes, but is not caused by GDP, while non‐residential investment does not cause, but is caused by GDP. Thus, housing leads and other types of investment lag the business cycle. The results also suggest that policies designed to funnel capital away from housing into plant and equipment could produce severe short‐run dislocations.