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Land Prices and Business Fixed Investments in Japan

Author

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  • Nobuhiro Kiyotaki
  • Kenneth D. West

Abstract

Japan has seen episodes in which boom and bust in land prices is accompanied by boom and bust in business fixed investment. We develop a model that includes land in the production function. We show that in this model movements in land prices will be associated with movements of the capital stock in the same direction, provided the elasticity of substitution between land and capital is greater than one. We then estimate an aggregate investment function. Consistent with an elasticity greater than one, increases in land prices are associated with increases in the business capital stock even after controlling for movements in output and the cost of capital; decreases have a symmetric effect. In the end, however, we find that movements in land prices explain relatively little of the movement in the business fixed investment. In addition to possibly indicating that the elasticity is very near one, the small effect may result because of difficulty in extracting information from noisy land prices, neglect of the effects of regulations, and failure to consider credit constraints.

Suggested Citation

  • Nobuhiro Kiyotaki & Kenneth D. West, 2004. "Land Prices and Business Fixed Investments in Japan," NBER Working Papers 10909, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:10909
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    Cited by:

    1. Charles Leung & N-K. Chen, 2006. "Intrinsic Cycles of Land Price: A Simple Model," Journal of Real Estate Research, Taylor & Francis Journals, vol. 28(3), pages 293-320, January.
    2. Kurita, Takamitsu, 2011. "An empirical model for Japan's business fixed investment," Journal of Economics and Business, Elsevier, vol. 63(2), pages 107-120, March.
    3. Kazumasa Iwata, 2007. "Housing and monetary policy in Japan," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 445-461.
    4. Kurita, Takamitsu, 2011. "An empirical model for Japan’s business fixed investment," Journal of Economics and Business, Elsevier, vol. 63(2), pages 107-120.

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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