Abstract
ABSTRACT This paper analyzes the impact of macroeconomic variables on house price volatility under different regimes of policy uncertainty, incorporating the Economic Policy Uncertainty Index and several Chinese macroeconomic data sets for the period from 1999 to 2014. We adopt a logistic smooth transition vector autoregressive model and a generalized impulse response function. The results show that macroeconomic progress leads to house price growth, which is augmented by policy uncertainty. In addition, the effect of macroeconomic shocks on house price volatility varies under different regimes of policy uncertainty. We find that shocks are asymmetric under regimes of high and low policy uncertainty. Under a high policy uncertainty regime, expansionary quantitative monetary policy can facilitate house price growth, whereas a contractionary monetary policy gives rise to an enduring “Home Price Puzzle,” which makes it difficult to regulate house prices.
Highlights
As real estate is a major component of household wealth in China, real estate price volatility attracts considerable attention from researchers and practitioners
House price volatility in China derives from the impact of monetary policy
Optimism in the macro environment leads to positive volatility in house prices, and this volatility tends to increase with policy uncertainty
Summary
As real estate is a major component of household wealth in China, real estate price volatility attracts considerable attention from researchers and practitioners. The data are the Chinese Economic Policy Uncertainty Index (the CEPU Index) provided by Baker et al (2015), the level of house price volatility, and other macroeconomic variables. We incorporate a generalized impulse response function (IRF) to examine the effect of macroeconomic variables on house price volatility under different levels of policy uncertainty. We include policy uncertainty in the construction of a short-term house price volatility model to predict the impact of macroeconomic variables in different environments. We introduce the CEPU Index into empirical research and verify the asymmetric effect of macroeconomic variables on policy uncertainty by applying an LSTVAR model and generalized impulse response function.
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