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Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets

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  • J. Scott Davis
  • Kevin X. D. Huang
  • Ayse Sapci

Abstract

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

Suggested Citation

  • J. Scott Davis & Kevin X. D. Huang & Ayse Sapci, 2020. "Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets," Globalization Institute Working Papers 401, Federal Reserve Bank of Dallas, revised 18 May 2021.
    • Handle: RePEc:fip:feddgw:88828
    DOI: 10.24149/gwp401r1
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    Cited by:

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    2. Zhou, Jing, 2022. "Collateral quality and house prices," Journal of Economic Dynamics and Control, Elsevier, vol. 145(C).
    3. Alban Moura & Olivier Pierrard, 2024. "Bayesian Evaluation of DSGE Models with Housing and Collateral Effects," Annals of Economics and Statistics, GENES, issue 155, pages 91-124.
    4. Liu, Huake & Nie, He & Sang, Di & Wang, Yu & Zhang, Xueren, 2025. "Optimizing green subsidy policies for decarbonization in Southeast Asia's real estate sector," Energy Economics, Elsevier, vol. 144(C).
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    6. Chibane, Messaoud & Poncet, Patrice, 2025. "Housing rare disaster events and asset prices," Economic Modelling, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    Commercial real estate; residential real estate; housing demand shock; zoning;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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