Liquidity Premia, Price-Rent Dynamics, and Business Cycles

54 Pages Posted: 4 Apr 2015

See all articles by Jianjun Miao

Jianjun Miao

Boston University - Department of Economics

Pengfei Wang

Peking University HSBC Business School

Tao A. Zha

Federal Reserve Bank of Atlanta; Emory University

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2014

Abstract

In the U.S. economy during the past 25 years, house prices exhibit fluctuations considerably larger than house rents, and these large fluctuations tend to move together with business cycles. We build a simple theoretical model to characterize these observations by showing the tight connection between price-rent fluctuation and the liquidity constraint faced by productive firms. After developing economic intuition for this result, we estimate a medium-scale dynamic general equilibrium model to assess the empirical importance of the role the price-rent fluctuation plays in the business cycle. According to our estimation, a shock that drives most of the price-rent fluctuation explains 30 percent of output fluctuation over a six-year horizon.

Keywords: asset pricing, financial frictions, working capital, cutoff productivity, heterogeneous firms, endogenous TFP, house price, liquidity constraint

JEL Classification: E22, E32, E44

Suggested Citation

Miao, Jianjun and Wang, Pengfei and Zha, Tao A., Liquidity Premia, Price-Rent Dynamics, and Business Cycles (August 1, 2014). FRB Atlanta Working Paper No. 2014-15, Available at SSRN: https://ssrn.com/abstract=2580439 or http://dx.doi.org/10.2139/ssrn.2580439

Jianjun Miao

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

Pengfei Wang

Peking University HSBC Business School ( email )

Tao A. Zha (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8353 (Phone)
404-521-8956 (Fax)

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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