Long-run Growth and Short-run Stabilization
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Long-run Growth and Short-run Stabilization

Essays in Memory of Albert Ando

Edited by Lawrence R. Klein

There is much confusion in the economics literature on wage determination and the employment–inflation trade-off. Few model builders pay as much careful attention to the definition and meaning of long-run concepts as did Albert Ando. Expanding on years of painstaking work by Ando, the contributors elaborate on the main issues of economic analysis and policies that concerned him.
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Chapter 12: Land Prices and Business Fixed Investment in Japan

Nobuhiro Kiyotaki and Kenneth D. West

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12. Land prices and business fixed investment in Japan* Nobuhiro Kiyotaki and Kenneth D. West 1. INTRODUCTION Japan has seen episodes in which boom and bust in land prices have been accompanied by boom and bust in business fixed investment. This occurred in the late 1980s and the early 1970s. In this chapter we formally model the link between movements in land prices and in business investment, and use regressions to quantify the importance of the link. In the end, however, our estimates attribute relatively little of the movement in business fixed investment to movements in land prices. Our model attempts to formalize the following intuition: when land prices rise due to (say) an increase in aggregate productivity, individual price-taking firms will try to economize on land by building taller structures and using more compact capital equipment. That is, all things equal, a rise in land prices will cause firms to shift towards technologies with higher ratios of capital to land. While our focus is on the behavior of a representative price-taking firm, we note that a similar shift may hold in the aggregate: in a class of growth models, an increase in aggregate productivity causes an increase in the aggregate capital–output ratio when the elasticity of substitution between capital and land is larger than one. That is, a rise in productivity will encourage business fixed investment above and beyond the usual direct effects through the cost of capital and output. A fall in aggregate productivity will have...

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