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Federal Reserve Bank of San Francisco
Working Paper Series
Land-price dynamics and macroeconomic fluctuations
Zheng Liu
Pengfei Wang
Tao Zha

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.

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Zheng Liu & Pengfei Wang & Tao Zha, Land-price dynamics and macroeconomic fluctuations, Federal Reserve Bank of San Francisco, Working Paper Series 2011-26, 2011.
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Keywords: Real property
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