Secular stagnation, financial frictions, and land prices

Abstract

We explore a model in which large transitory financial shocks can generate persistent slumps in output, land prices, and interest rate. The propagation channel works through a high sensitivity of land prices with respect to fundamental, achieved by a high complementarity between land services and consumption in households’ preference. When this complementarity is disciplined by micro-level evidence, the equilibrium features non-linear dynamics between two steady states. Large transitory financial shocks push the economy into a constrained region in which low interest rate makes firm unwilling to save out of the financial friction, leading to a secular stagnation. (JEL codes: E13, E32, E44)