Urban Structure, Land Prices and Volatility

We develop a dynamic general equilibrium model that describes the evolution of land prices and rental rates in a monocentric city. The model explores the implications of urban configurations that may differ in terms of the flexibility of the citys borders and land use, i.e., zoning and the presence of undevelopable land, as well as differences in transit technology, i.e., cars versus rail. The model also considers the effect of production technologies that have different land use intensities and agglomeration externalities. Our analysis suggests that volatility is amplified when production exhibits strong agglomeration effects, and is dampened when land use plays a larger role in the production function and when transit exhibits strong congestion effects. In some settings land supply constraints make rental rates more volatile. However, we also identify settings under which increases in land supply constraints dampen volatility.