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Through the collateral channel for entrepreneurs, a positive housing demand shock in Liu et al. [(2013) Econometrica 81, 1147–1184.] increases land prices and business investment, but consumption decreases on impact and there is thus a comovement problem. This paper improves Liu et al. [(2013) Econometrica 81, 1147–1184.] by adding general household preferences with broader intratemporal and intertemporal substitutions Bayesian estimation of our structural model based on aggregate US data suggests that the intratemporal substitution is larger than unity and the intertemporal substitution is smaller than unity. Our impulse responses show that a positive housing demand shock increases land prices, business investment, and consumption, which resolves the comovement problem. Moreover, the strength of the collateral channel linking land prices and business investment in our Bayesian DSGE model is larger than that in Liu et al. [(2013) Econometrica 81, 1147–1184.]. Housing demand shocks explain 39−43% of the variance of output and 41−47% of the variance of investment in our model, but the same shocks explain only 17−31% of the variance of output and 30−41% of the variance of investment in Liu et al. [(2013) Econometrica 81, 1147–1184.]. Variance decomposition reveals that housing demand shocks account for a larger share of the fluctuations in land prices, investment, employment, and output than other shocks. Using the marginal data density as the measure of fit for models, we find that our model can better explain the same US aggregate data. [ABSTRACT FROM AUTHOR]

We revisit the Friedman rule in a labor search model and extend Heer (2003), Cooley and Quadrini (2004), and Wang and Xie (2013) to one that allows for endogenous growth. We show that, even without a liquidity effect or a CIA constraint on firms' wage payment, our model offers a different channel for moderate money growth to increase welfare. Intuitively, in a one-sector endogenous growth economy, the technology is of constant returns with respect to capital. When the labor market is frictional, a moderate increase in money growth induces an expansion in vacancy and employment. Labor and capital are complements in production. With an increase in employment, when the technology is neoclassical, the decreasing return in capital leads to a lower marginal product of labor. However, in an endogenous growth framework wherein the technology exhibits socially constant returns in capital, the marginal product of labor is constant. Due to a constant marginal product of labor, modest inflation raises employment, enlarges economic growth, and increases welfare. Moreover, the optimal long-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Finally, we find that our model with sustainable growth fits the data better than that without sustainable growth. [ABSTRACT FROM AUTHOR]