The Impact of China's Monetary Policy on Real Estate Prices

Abstract

Real estate is an important asset in a modern economy, with its price fluctuation having a great impact on economic growth, financial stability and social cohesion. Although primary goals of monetary policy are low and stable inflation and business cycle stabilization, it also affects real estate price. This paper centers around the impact of monetary policy on real estate price, and tries to analyze this issue empirically using Chinese data. First, the paper conducts Granger causality tests to investigate the predictability among real estate prices in major cities in China. Then, the paper sets up a vector-autoregression model with monetary variables, output, inflation and real asset price. The impulse response analysis shows that a rise in interest rate lowers real estate price while an increase in broad money (M2) raises real estate price. The paper also finds that M2 has the greatest impact on real estate price, followed by interest rate, output and inflation.

Key Words: Monetary Policy, Real Estate Price, Money Supply, Interest Rate, VAR Model, Impulse response Analysis