The effect of monetary policy on China’s housing prices before and after 2017: A dynamic analysis in DSGE model

Abstract

There is an anomaly of “the more regulation, the more rise” in China’s housing market before 2017. However, the anomaly seems to have reversed since 2017. To analyze the mechanism that leads to this transition, we construct a Dynamic Stochastic General Equilibrium (DSGE) model, including the public expectations about monetary policies. Before 2017, housing prices still rise due to the“tight-loose-tight…” regulatory policy, which leads the public to expect that tightening policies will not continue. However, since 2017, the government strengthens the consecutive tight policy, which leads to a continuous tight policy expectation like “tight-tight-tight…”. That’s the key to stabilizing China’s housing prices. The numerical analysis shows that the persistence of tight policies and the public’s expectations are the most important factors affecting China’s housing prices. As for China’s government, it is not only necessary to maintain the tightening policy but also to guide the public to form expectations of continuous tightening policy. As for the public, it is necessary to make investment decisions by judging the persistence of tight monetary policy.