Liquidity Premia, Price-Rent Dynamics, and Business Cycles
Jianjun Miao (),
Pengfei Wang () and
Tao Zha ()
No 2014-15, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta
n the U.S. economy during the past 25 years, house prices exhibit fluctuations considerably larger than house rents, and these large fluctuations tend to move together with business cycles. We build a simple theoretical model to characterize these observations by showing the tight connection between price-rent fluctuation and the liquidity constraint faced by productive firms. After developing economic intuition for this result, we estimate a medium-scale dynamic general equilibrium model to assess the empirical importance of the role the price-rent fluctuation plays in the business cycle. According to our estimation, a shock that drives most of the price-rent fluctuation explains 30 percent of output fluctuation over a six-year horizon.
Keywords: asset pricing; financial frictions; working capital; cutoff productivity; heterogeneous firms; endogenous TFP; house price; liquidity constraint (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 (search for similar items in EconPapers)
Pages: 54 pages
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-ure
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