Working Paper

Residential investment and recession predictability

Author: Knut Are Aastveit, André K. Anundsen and Eyo I. Herstad
Series: Working Paper
Number: 24/2017

Working Paper 24/2017 (PDF 485.3 Kb)

Abstract:

We assess the importance of residential investment in predicting economic recessions for an unbalanced panel of 12 OECD countries over the period 1960Q1-2014Q4. Our approach is to estimate various probit models with different leading indicators and evaluate their relative prediction accuracy using the receiver operating characteristic curve. We document that residential investment contains information useful in predicting recessions both in-sample and out-of-sample. This result is robust to adding typical leading indicators, such as the term spread, stock prices, consumer confidence surveys and oil prices. It is shown that residential investment is particularly useful in predicting recessions for countries with high home-ownership rates. Finally, in a separate exercise for the US economy, we show that the predictive ability of residential investment is robust to employing real-time data.

Published 16 November 2017 15:45