Working Paper: NBER ID: w17045
Authors: Zheng Liu; Pengfei Wang; Tao Zha
Abstract: We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms' credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment.
Keywords: land prices; macroeconomic fluctuations; business investment; collateral asset; housing demand shock
JEL Codes: E21; E27; E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| housing demand shock (R21) | land prices (R31) |
| housing demand shock (R21) | business investment (G31) |
| housing demand shock (R21) | output (C67) |
| land prices (R31) | borrowing capacity (H74) |
| borrowing capacity (H74) | business investment (G31) |
| land prices (R31) | business investment (G31) |
| land prices (R31) | labor hours (J22) |
| land prices (R31) | consumption (E21) |