RESIDENTIAL INVESTMENT AND THE CURRENT ACCOUNT

Residential investment is an important driving force in the current account. This paper first builds the model to show that residential investment, for the empirically relevant case where demand for housing services has nonzero income elasticity, is fundamentally different from nonresidential investment. Owing to this income effect, the dynamics of housing are subject to the additional integral constraint, as well as the standard stock adjustment and Euler equations. The model is used to examine the effects of changes in government purchases on the tradeable good, housing subsidies and productivity shocks on the current account. © 1990.