Taxation, collateral use of land, and Japanese asset prices
AbstractJapan experienced a significant increase in land and stock prices in the late 1980s and a subsequent reversal in these asset prices in the 1990s. I use a neoclassical growth model to determine how much of these asset price movements can be accounted for by the observed changes in output growth and land-related taxation. In the model, corporations issue land-collateralized debt to reduce their tax liabilities, and the government follows a land-taxation policy that is countercyclical to land prices. Without these features, the model cannot generate any significant change in land values, even with a permanent increase in the growth rate of the economy, because a permanent increase in the growth rate results in a comparable increase at the rate at which agents discount future returns. The collateral use of land and countercyclical land-tax policy introduce a substantial magnification mechanism for asset prices by reducing the required return on land. I calibrate the model to Japanese data, and conduct steady-state experiments and deterministic simulations. I show that if the observed increase in the growth rate of productivity and the decline in land taxes were expected to be permanent by market participants, then the model can by and large account for the movements in land and stock prices, but has counterfactual predictions regarding the behavior of capital. If agents expect the observed changes in the fundamentals to be temporary, then the model cannot generate a significant increase in these asset prices. Copyright Springer-Verlag 2012
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Volume (Year): 43 (2012)
Issue (Month): 2 (October)
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Find related papers by JEL classification:
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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