We study the role of residential housing in financing capital investment in a dynamic stochastic general equilibrium framework. Residential housing, though nonproductive, is shown to be important in determining the cost of external financing for investment on productive capital. Housing stock serves as collaterals in financial contracts for capital investment. We find that fluctuations in the return to capital investment is not enough for accounting the cyclical behavior of external finance premia and bankruptcy rates. Fluctuations of house prices help generate countercyclical external finance premia and bankruptcy rates by a great deal
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
207.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:207
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