NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity Premia, Price-Rent Dynamics, and Business Cycles

Jianjun Miao, Pengfei Wang, Tao Zha

NBER Working Paper No. 20377
Issued in August 2014
NBER Program(s):AP, EFG, ME

In the U.S. economy over the past twenty five 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% of output fluctuation over a six-year horizon.

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Document Object Identifier (DOI): 10.3386/w20377

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