The Impact of Fiscal Policy on Residential Investment in France Pamfili Antipa, Christophe Schalck The Macroeconomics of Housing Markets Paris, 3 rd of December 2009

Outline of the presentation 1.Fiscal intervention on the French housing market 2.Methodology 3.Empirical results 4.Conclusive remarks

Overview of the housing market (1)

Overview of the housing market (2) Subsidies’ growth rate fluctuates with residential investment Declining GDP / investment share Three categories: tax, interest rate and financial subsidies Housing subsidies

Overview of the housing market (3) Cyclical pattern Increasing GDP/ investment share Two categories: indirect and property taxes Housing taxes

The methodology (1) Data: –National accounts and French ministry of housing. –1984 – 2006 period. Considered variables: –Endogenous: residential investment, permanent income, households’ borrowing capacity, fiscal variables –Exogenous: housing prices, interest rates

The methodology (2) VECM Partly accounts for endogeneity Allows for more than one error correction mechanism Estimation procedure as in Lütkepohl (2004) All series are first order integrated Number of lags fixed by AIC Determination of cointegration rank (whole system and pairs of variables) 1 cointegration relationship

Empirical results (1) Standard Specification Long run Short run

Empirical results (2) Standard Specification

Empirical results (3) What about the borrowing capacity?

Empirical results (4) Which type of subsidy to use?

Conclusive remarks Subsidies (especially tax subsidies) can play a role for the stabilisation of residential investment and hence the business cycle  should be the main tool of fiscal policy; Taxes are not significant in the long run; These results are robust over different specifications, including when households’ borrowing capacity is taken on board; Results should nonetheless be interpreted cautiously, as data sample is relatively short.