Revisiting the nexus between house pricing and money demand: Power spectrum and wavelet coherence based approach

Abstract

This study examines the impact of house price on money demand in case of China for the period of 1988Q1-2017Q4. The present study used different estimators, which are robust to handling the endogeneity issues in the data, to capture the long-run effect of housing price index on money demand while controlling for interest rate, gross domestic product and consumer price index. The results suggest that house prices along with GDP, inflation and interest rate are important factors in explaining the money demand in China. To capture the vulnerability periods and identify the behaviour of the money demand and house price index variables in China, this study employs wavelet power spectrum. The results further show that there was a significant vulnerability in money demand between 2006 and 2012 in the short and medium terms. Besides, in order to identify the co-movement between house price and money demand in China, the continuous wavelet coherence approach is applied. The outcomes of continuous wavelet coherence approach reveal that there is strong linkage between money demand and house price index between 2002 and 2018 at both short and long terms. The results show that there is a positive and significant correlation between money demand and house price index in China. Thus, house price index can be a predictive factor for future money demand at low, middle and high frequencies.