Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets

51 Pages Posted: 5 Oct 2020 Last revised: 11 Jan 2022

See all articles by Scott Davis

Scott Davis

Federal Reserve Banks - Federal Reserve Bank of Dallas

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Ayse Sapci

Utah State University

Date Written: September, 2020

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

JEL Classification: E30, R10, R30

Suggested Citation

Davis, Scott and Huang, Kevin X. D. and Huang, Kevin X. D. and Sapci, Ayse, Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets (September, 2020). Globalization Institute Working Paper No. 401, Available at SSRN: https://ssrn.com/abstract=3704099 or http://dx.doi.org/10.24149/gwp401r1

Scott Davis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Kevin X. D. Huang

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Ayse Sapci

Utah State University ( email )

Logan, UT 84322
United States

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