Land prices, speculative demand, and inflation persistence: a New Keynesian framework

Abstract

This paper studies inflation persistence in a New Keynesian model in which urban land serves simultaneously as a productive input and a speculative store of value. Speculative land demand responds to expected inflation through a threshold rule, and land prices feed back into firms’ marginal costs as a cost-push channel in the Phillips curve. The steady-state system reduces to a one-dimensional fixed-point problem, permitting a global characterization of equilibria under adaptive learning. Land prices amplify steady-state inflation even when the equilibrium is unique. When a composite slope statistic that aggregates monetary responsiveness to land prices, the fiscal stance on speculative demand, market-clearing amplification, and speculative sensitivity exceeds a critical threshold, multiple learnable steady states coexist, and temporary demographic shocks generate permanent transitions to high inflation. A tax on speculative land demand is a first-order improvement in local stabilization around the low-inflation regime and complements rather than substitutes for monetary policy.