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Real Estate, the External Finance Premium and Business Investment: A Quantitative Dynamic General Equilibrium Analysis

  • Jin, Yi
  • Leung, Charles Ka Yui
  • Zeng, Zhixiong

This paper studies the connection between the capital market and the real estate market. Empirically, we find that positive real house price shocks lower the external finance premium and stimulate nonresidential investment and real GDP. Our theoretical framework is able to mimic the volatility of the external finance premium, the relative price of real estate and capital, and the investment in real estate and capital. It also captures the cyclicality of the external finance premium and of real estate prices. The contribution of real estate price fluctuations to the variability of the external finance premium and the GDP is confirmed to be significant.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26722.

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Date of creation: Nov 2010
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Handle: RePEc:pra:mprapa:26722
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