Land Prices and Business Fixed Investments in Japan

39 Pages Posted: 7 Dec 2004 Last revised: 24 Apr 2022

See all articles by Nobuhiro Kiyotaki

Nobuhiro Kiyotaki

London School of Economics & Political Science (LSE) - Department of Economics; National Bureau of Economic Research (NBER)

Kenneth D. West

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2004

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.

Suggested Citation

Kiyotaki, Nobuhiro and West, Kenneth D., Land Prices and Business Fixed Investments in Japan (November 2004). NBER Working Paper No. w10909, Available at SSRN: https://ssrn.com/abstract=622623

Nobuhiro Kiyotaki (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Kenneth D. West

University of Wisconsin - Madison - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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United States

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