Working Paper Revision
Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets
Abstract: The collateral channel, whereby an increase in residential house prices leads to an increase in commercial property prices, loosening firm borrowing constraints and leading to higher firm investment, is weaker when residential and commercial real estate are imperfect substitutes. We first show in a reduced form regression with firm level data that the strength of local zoning regulations has a negative effect on the estimated increase in firm investment following an increase in local residential real estate prices. We then modify the DSGE model of the collateral channel in Liu, Wang, and Zha (2013) to allow imperfect substitutability between residential and commercial land. With Bayesian estimation and U.S. data, we estimate that the elasticity of substitution between the two types of land is 0.88. Variance decompositions and impulse responses show that the strength of the collateral channel linking house prices and investment is weaker when the two types of land are imperfect substitutes
Keywords: Commercial real estate; residential real estate; housing demand shock; zoning;
JEL Classification: E30; R10; R30;
https://doi.org/10.24149/gwp401r1
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Bibliographic Information
Provider: Federal Reserve Bank of Dallas
Part of Series: Globalization Institute Working Papers
Publication Date: 2021-05-18
Number: 401
Related Works
- Working Paper Revision (2021-05-18) : You are here.
- Working Paper Original (2020-09-28) : Imperfect Substitutability in Real Estate Markets and the Effect of Housing Demand on the Macroeconomy