Working Paper: NBER ID: w10909
Authors: Nobuhiro Kiyotaki; Kenneth D. West
Abstract: Japan has seen episodes in which boom and bust in land prices is accompanied by boom and bust in business fixed investment. We develop a model that includes land in the production function. We show that in this model movements in land prices will be associated with movements of the capital stock in the same direction, provided the elasticity of substitution between land and capital is greater than one. We then estimate an aggregate investment function. Consistent with an elasticity greater than one, increases in land prices are associated with increases in the business capital stock even after controlling for movements in output and the cost of capital; decreases have a symmetric effect. In the end, however, we find that movements in land prices explain relatively little of the movement in the business fixed investment. In addition to possibly indicating that the elasticity is very near one, the small effect may result because of difficulty in extracting information from noisy land prices, neglect of the effects of regulations, and failure to consider credit constraints.
Keywords: Land Prices; Business Investment; Japan; Neoclassical Investment Model
JEL Codes: E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| land prices (R31) | business capital stock (E22) |
| increase in aggregate productivity (O49) | land prices (R31) |
| land prices (R31) | business fixed investment (G31) |
| elasticity of substitution > 1 (D11) | business capital stock (E22) |