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Discount Shock, Price-Rent Dynamics, and the Business Cycle

Jianjun Miao, Pengfei Wang, Tao Zha

NBER Working Paper No. 20377
Issued in August 2014, Revised in January 2020
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics

The price-rent ratio is highly volatile and predicts future returns for commercial real estate. Price-rent variations in commercial real estate also tend to comove with investment and output. We develop a general equilibrium model that explicitly introduces a rental market and incorporates collateral constraints on production as a key ingredient. Our estimation identifies discount-rate shocks as the most important factor in (1) driving price-rent variations, (2) producing the long-horizon predictability of real estate returns, and (3) linking the dynamics in commercial real estate to those in the production sector.

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Document Object Identifier (DOI): 10.3386/w20377

Published: Jianjun Miao & Pengfei Wang & Tao Zha, 2020. "DISCOUNT SHOCK, PRICE–RENT DYNAMICS, AND THE BUSINESS CYCLE," International Economic Review, vol 61(3), pages 1229-1252.

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