Equilibrium real price of a fixed asset in a growing economy

The paper deals with equilibrium real price of a fixed asset in a growing economy. The supply of this kind of assets is by assumption fixed. Land or unique works of art are probably their closest empirical counterparts. Economic growth is manifested by a systematic increase in the real price of services provided by the asset. The rate of growth of their price depends on price and income elasticities of the demand for the services. Given these elasticities, an equilibrium price of the asset can expressed using the present value model. The equilibrium real asset price increases in time in the same rate as the real price of the services. The asset price can be highly sensitive to changes in values of the permanent rate of economic growth and real interest rate. Transitory changes in economic growth, however, seem to have only minor effect on the equilibrium price.

Keywords: depreciation, economic growth, asset prices, present value model, real interest rates, price elasticities