Residential investment, macroeconomic activity and financial deregulation in the UK: an empirical investigation

Abstract

This paper empirically examines the relationship between UK macroeconomic variables and residential investment over the period 1968Q1 to 1999Q1. The impact of macroeconomic variables are evaluated by computing both historical decompositions (HDCs) and variance decompositions (VDCs) in a six-variable VAR model. The VDC results suggest fiscal policy variable exerts a modest and significant impact on residential expenditures, monetary policy variables appear to have larger and perceptible influences on residential expenditures in the long run. The HDC findings, on the other hand, indicate that money stock marginally lowers the MSE of base projection of residential investment over the pre-deregulation period. Nevertheless, the explanatory power of money is shown to evaporate during the post-deregulation period. Thus, our findings strongly confirm that the deregulatory measures of 1980s have significantly altered the nature and strength of causal linkages between residential investment and macroeconomic variables.