The Interaction Between Land-Price And Macroeconomic Dynamics

This paper mainly discusses how positive co-movements between land prices and business investment become a driving force behind the broad impact of land-price dynamics on the macro economy. 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. We study the interaction between land price and macroeconomics dynamics in China and further strongly justify the mechanism.