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This article studies the connection between the capital market and the real estate market. Empirically, we find that positive real house price shocks lower the external finance premium and stimulate nonresidential investment and real gross domestic product (GDP). Our theoretical framework is able to mimic the volatility of the external finance premium, the relative price of real estate and capital and the investment in real estate and capital. It also captures the cyclicality of the external finance premium and of real estate prices. The contribution of real estate price fluctuations to the variability of the external finance premium and the GDP is confirmed to be significant.This article attempts to study a natural but perhaps underexplored connection between the imperfect capital market and the real estate market. An emerging literature indicates that the real estate market is closely related to the business cycles (Greenwood and

The unconventional monetary policy actions of the Federal Reserve during the recent Global Financial Crisis often involve implicit subsidies to banks. This paper o¤ers a theory of the non-neutrality of money associated with capital injection into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided …nancial contracting. We …rst show that even with perfect nominal ‡exibility, the recapitalization policy has real e¤ects on the economy. We then introduce banking riskiness shocks and study optimal policy responses to such shocks.JEL Classi…cation: E44, E52, D82, D86.

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