Abstract
With the help of the time-varying parameter vector autoregression with stochastic volatility (TVP-SV-VAR) model and the Bayesian dynamic conditional correlational autoregressive conditional heteroscedasticity (Bayesian DCC-GARCH) model, this study analyzes the interaction mechanism and dynamic correlation among financial leverage, house price, and consumer expenditure (the survey data are collected from China’s National Bureau of Statistics from January 2000 to December 2019; the data on financial leverage and consumer expenditure are from the Wind economic database, and the price of commercial housing was calculated based on the sales volume and area of commercial housing on the official website of China’s National Bureau of Statistics). Empirical results show that an increase in financial leverage significantly increases house prices and reduces consumer expenditure, that a rise in house prices inhibits financial leverage and weakens consumer expenditure, and that an increase in consumer expenditure raises financial leverage and stimulates a rise in house prices. In addition, house price and consumer expenditure are most relevant, followed by financial leverage and consumer expenditure, and then by financial leverage and house price. Therefore, systematic analysis of dynamic correlation among the three variables has important practical significance for formulating appropriate financial policies to stabilize house prices and promote the growth of consumer expenditures. Specially, financial leverage is an important factor to hold back soaring house prices and shrinking consumer expenditure. Therefore, monetary and macroprudential policies should be used to deal with financial leverage variables in order to achieve a balanced and sustainable development of the macroeconomy in China.
Highlights
After more than 40 years of rapid development, China has achieved world-renowned economic growth but has accumulated more and more urgent problems to be resolved, such as a widening gap between the rich and the poor, lack of social security, and rising labor costs
The Bayesian dynamic condition correlation (DCC)-GARCH model was used to analyze the dynamic correlation among financial leverage, house price, and consumer expenditure
This study first analyzes the mechanism of action and transmission among China’s financial leverage, house price, and consumer expenditure in recent years by constructing a TVP-SVVAR model with both time-variant parameters and stochastic volatility (Figure 8 shows the interaction of financial leverage, house price, and consumer expenditure)
Summary
After more than 40 years of rapid development, China has achieved world-renowned economic growth but has accumulated more and more urgent problems to be resolved, such as a widening gap between the rich and the poor, lack of social security, and rising labor costs. The rapid rise in China’s financial leverage and house prices and the sharp decline in consumption growth have been striking. Some studies have shown that the rapid increase in house prices and great volatility in the macroeconomy are closely related to financial leverage. It is not difficult to see that in-depth analysis of the relationship among financial leverage, house price, and consumer expenditure can help us understand and resolve some important issues that China is facing (e.g., stabilizing leverage, stabilizing house price, and boosting consumption) and achieve sustainable economic growth.
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