The robustness of the causal and economic relationship between construction flows and economic growth: evidence from Western Europe

Abstract

Our main objective is to analyze whether we have a problem of parameter heterogeneity across countries and over time in the estimation of the relationship between infrastructure investments and economic growth. The research approach concerning causality and the estimating of the long run equilibrium is based on the error correction model. The problem of parameter heterogeneity is handled by the use of interaction terms. The result indicates that residential construction Granger causes GDP in the short and long run and it seems likely that the interaction term indicating high unemployment do add some explanation power to the model. This is not true when it comes to infrastructural and other building construction and its impact on economic growth. A high housing stock per capita seems to reduce the short run effect. That implies that residential construction seems to have a larger effect if the accumulated residential stock is on a low level. The speed of adjustment to long run equilibrium differs considerably between a country with a low residential capital stock and a country with a high capital stock. Moreover, high owner occupation rates seem to be associated with a stronger relationship between residential construction and economic growth.