Land Prices, Credit Frictions, and Macroeconomic Policy

Abstract

This paper constructs and estimates a New Keynesian macroeconomic model in which land is a collateral asset for all rms and some households. Exogenous shocks to households' land demand are the primary driver of land price uctuations which, ampli ed and propagated through a \ nancial accelerator," drive a signi cant portion of business cycle dynamics. Adding adaptive learning about technology shocks is strongly favored by the data and helps explain co-movements in land prices, borrowing, and consumption. Monetary policy, operating through income and wealth as well as substitution e ects, results in short-term contractions but longterm expansions of household and rm borrowing. Macroprudential policy, given weak propagation of dynamic collateral constraint shocks to the macroeconomy, is considerably less impactful. The model provides a platform on which to build further analysis of the housing, credit, labor, and goods markets in aggregate general equilibrium and conduct relevant policy counterfactual analysis.