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DISCOUNT SHOCK, PRICE–RENT DYNAMICS, AND THE BUSINESS CYCLE
Author(s) -
Miao Jianjun,
Wang Pengfei,
Zha Tao
Publication year - 2020
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12455
Subject(s) - real estate , business cycle , economics , market liquidity , liquidity constraint , shock (circulatory) , nexus (standard) , general equilibrium theory , renting , constraint (computer aided design) , monetary economics , microeconomics , econometrics , macroeconomics , finance , medicine , mechanical engineering , computer science , law , political science , embedded system , engineering
The price‐rent ratio in commercial real estate is highly volatile and its variation comoves with the business cycle. To account for these facts, we develop a dynamic general equilibrium model that introduces a rental market and incorporates the liquidity constraint on an individual firm's production as a key ingredient. Our estimation identifies the discount shock as the most important factor in driving price‐rent dynamics and linking the dynamics in the real estate market to those in the real economy. We illustrate the importance of the liquidity premium and endogenous TFP in the nexus of the financial and real sectors.