Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets
Jonathan Davis (),
Kevin Huang () and
Ayse Sapci ()
No 401, Globalization Institute Working Papers from Federal Reserve Bank of Dallas
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 (search for similar items in EconPapers)
JEL-codes: E30 R10 R30 (search for similar items in EconPapers)
Date: 2020-09-28, Revised 2021-05-18
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:88828
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