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DISCOUNT SHOCK,PRICE–RENT DYNAMICS,AND THE BUSINESS CYCLE |
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| Authors: | Jianjun Miao Pengfei Wang Tao Zha |
| Institution: | 1. Boston University, U.S.A.;2. Hong Kong University of Science and Technology, Hong Kong
Peking University HSBC Business School, China;3. Federal Reserve Bank of Atlanta, Emory University, and NBER, U.S.A. |
| Abstract: | The price-rent ratio in commercial real estate is highly volatile and its variation comoves with the business cycle. To account for these facts, we develop a dynamic general equilibrium model that introduces a rental market and incorporates the liquidity constraint on an individual firm's production as a key ingredient. Our estimation identifies the discount shock as the most important factor in driving price-rent dynamics and linking the dynamics in the real estate market to those in the real economy. We illustrate the importance of the liquidity premium and endogenous TFP in the nexus of the financial and real sectors. |
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