Dynamic Modelling of the Building Cycle: 1. Theoretical Framework

The paper is a report on the second stage of a project designed to investigate the incidence and causes of postwar building cycles in the British economy. In the first stage spectral analysis was used to identify the main postwar cycles in each sector of building (industrial, commercial, and residential), and the second stage has been concerned with the development of a theoretical framework suitable for dynamic modelling of these cycles. The modelling framework incorporates both an endogenous cyclical mechanism of the type used in accelerator models of investment, to reflect the long production lags in building activity, and the exogenous influence on the building cycle of variations in economic factors such as gross domestic product and interest rates. The modelling technique used to formulate the theoretical framework is based upon a transfer-function model of the Box–Jenkins type, incorporating an error-correction mechanism to reproduce the short-run dynamics and long-run equilibrium relationships between the variables. The third stage empirical results of the model-building exercise are reported in a separate paper.