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Real Estate Prices, Borrowing Constraints and Business Cycles -A Study of the Japanese Economy

Author

Listed:
  • Suparna Chakraborty

    (University of Minnesota & Federal Reserve Bank of Minneapolis)

Abstract

This paper investigates the causes of business cycle fluctuations that Japan experienced over the period 1980 to 2000. To this end, I build a dynamic general equilibrium model with endogenous borrowing constraints where business cycle fluctuations are the result of TFP fluctuations and investment frictions. I identify land tax changes since 1984 as a possible source of investment frictions, the idea being that given a strong preference for debt-financing and widespread use of land as collateral in Japan, land tax changes will cause fluctuations in land price that can potentially affect output and investment by affecting borrowing capacity of firms. Calibrating the model using Japanese data and feeding in observed TFP and land taxes one by one and in unison, I find that TFP and land tax fluctuations can significantly account for observed fluctuations in output, but cannot account for land price fluctuations unless agents expect land tax changes to be permanent. I further identify redistribution of land holding between commercial and residential uses in response to land tax and TFP changes as an important channel through which the effect of these external fluctuations on output gets amplified. Observed data of land use in Japan provides evidence of such redistribution.

Suggested Citation

  • Suparna Chakraborty, 2005. "Real Estate Prices, Borrowing Constraints and Business Cycles -A Study of the Japanese Economy," Macroeconomics 0504012, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0504012 Note: Type of Document - pdf; pages: 60
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    File URL: http://econwpa.repec.org/eps/mac/papers/0504/0504012.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jahangir Aziz, 2006. "Rebalancing China’s Economy; What Does Growth Theory Tell Us?," IMF Working Papers 06/291, International Monetary Fund.
    2. C Niranjan Rao, 2008. "The Role of Intellectual Property Rights in Information and Communication Technologies," Working Papers id:1742, eSocialSciences.
    3. Jahangir Aziz, 2008. "Deconstructing China’s and India’s Growth: The Role of Financial Policies," Working Papers id:1714, eSocialSciences.
    4. Jahangir Aziz, 2008. "Real and Financial Sector Linkages in China and India," IMF Working Papers 08/95, International Monetary Fund.
    5. Jahangir Aziz, 2008. "Deconstructing China’s and India’s Growth - The Role of Financial Policies," Macroeconomics Working Papers 22142, East Asian Bureau of Economic Research.

    More about this item

    Keywords

    Real estate; borrowing constraint; business cycle; japan;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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