Research On Relationship Between Real Estate Price And Monetary Policy

At the conference on celebrating the 300th anniversary of the founding of Bank of England in 1994, Greenspan, the chairman of the US Federal Reserve Board, put forward the problem whether the central bank should pay more attention to asset price bubble. Thus it raised the warm discuss on the relationship between asset price and monetary policy around academic cycles and central banks from the late 1990s. Real estate is important asset owned by enterprises and residents. Because real estate has dual nature of consumption goods and investment goods, its price fluctuations will possibly make deeper and wider impact on real economy and financial system than equity price and other financial assets. So real estate price fluctuations raised serious challenge to monetary policy.The real estate industry of our country has been in the fast growing period after development of twenty years. Especially, the decision of the central government on stopping material distribution of houses early in 1998 heightened continuously the real estate market degree. And the effect of pulling the economy of the real estate industry has been gradually significant. It has become the pillar of national economy. Moreover, with the transition from administrative means to economic means of the macro-regulatory mode, the role of monetary policy is becoming more and more important. In the background, we need do deep research on the impact of real estate price on every side of the monetary policy framework by using foreign research experiences for reference and combining with China's reality. These sides include the supply and demand of money, the monetary transmission mechanism, the targets of price stability and financial stability, and the monetary policy on the condition of open economy. And it is also necessary to discuss the correction direction of our country's monetary policy framework. Based on this, the dissertation will form an integrated view on the relation between China's real estate price and monetary policy.The research on relationship between real estate price and the supply and demand of money is the starting point and base. The author believes that the endogenous money theory can perfectly interpret the relation in the theory. In the current time, under endogenous monetary system, there exist two ways of endogenous money expansion resulted from real estate price fluctuation. One is the increment of credit demand based on real estate mortgage leading to commercial banks increasing endogenous money supply. The other is inflow of foreign currency attracted by the continuous rise of house prices and expectation of RMB appreciation resulting in central bank passive releasing a large amount of base money. The second chapter initially verified the facts that real estate price fluctuation had made money demand unstable, and strengthened the endogenous nature of money supply through Granger causality test. Then this chapter discussed the key factors in the impact route of real estate price fluctuations on money supply and demand under endogenous monetary system in theory, by using relative theory model, such as credit allocation model. Such impact can influence the validity of monetary intermediate target of monetary supply based on the stable money supply and demand and exogenous money supply, and enlarge the difficulty of the monetary policy regulatory. So the author thinks that on the current facts that we cannot abandon the nominal anchor of monetary supply, a makeshift is that the monitoring data of real estate market should be ranked the reference indicator, which is used as one of the leading indicators of exerting function of economy reflection.Monetary policy transmission mechanism is the focus problem of monetary policy research. Real estate market being progressively mature makes the real estate price's capability of bearing and transmitting the signal of monetary policy strengthened continuously, and further has substantial impact on macro economy. Consequently, it is important to research on the role of real estate price in the monetary policy transmission mechanism. Real estate industry is capital-intensive industry, and neither of its demand and supply can leave the support of finance. Therefore, monetary policy has very important influence on real estate price fluctuations. Every change of monetary policy also influences real estate market through credit channel. At the same time, real estate price fluctuations have impact on consumption and investment of real economy and further on the realization of the targets of monetary policy, price stability and stable increase of economy, by Tobin'Q effect, wealth effect and expectation effect etc. Moreover, in China which still mainly depend on indirect finance, real estate as the most important asset of enterprise and resident, the rise of its price also raises the capability of credit expansion of banks, thus has profound impact on real economy by balance sheet effect. So real estate price has the role of potential amplifier in the process of monetary policy transmission. Based on the theoretical analysis, the third chapter applied the vector error correction model (VECM)to empirically test the role of house price in the monetary transmission mechanism. The result of analysis indicated that the role of house price in the monetary transmission mechanism was significant, and the efficiency of transmission through the channel of house price was high. So the real estate market had become the important channel of monetary transmission in our country. Accordingly, the author thinks central bank of China should pay more attention to monetary transmission mechanism of real estate market, and promote the harmonious and stable development of money market, real estate market and macro economy.Most of countries'central banks always take price stability as chief even only target of monetary policy, but the price indices that most of them use for measuring inflation don't include asset prices, such as real estate price and equity price etc. After 1970s, there coexisted low inflation and asset prices frequent fluctuations in many countries. Many domestic and foreign scholars are discussing on whether the central bank should reflect on asset price fluctuations. Such research is based on the research on the effect of asset price fluctuations on price stability, which is the final target of monetary policy. The research is answer of the problems whether asset price should be added to the measure of inflation and how inflation pressure is measured accurately. The fourth chapter of the dissertation mainly analyzed two problems, one is what relationship between real estate price and inflation, and the other is whether real estate price should be added to the traditional price index and the loss function of central bank as target of monetary policy. For the first problem, the dissertation explained it in theory both from the angles of rational investors and monetary authorities, and introduced the function of asset prices index(FCI)to refection on future pressure of inflation; Meanwhile applied ARDL model to test the impact of real estate price on inflation, estimated the inflation forecast equation which included the real estate price, and utilized instrument variable method and autocorrelation model for testing the information of inflation in real estate price and the Fish effect of it, under the assumptions of adaptive expectation and rational expectation respectively. For the second problem, the dissertation introduced many kinds of generalized price indices that include asset prices, and analyzed in detail the feasibility of broad sense price indices as the measure of inflation. The author think real estate price can forecast the future inflation, meanwhile the Fish effect is notable, and the real estate price can hedge the future inflation, which proved real estate price really included the expectation of inflation, and the central bank need understand the information of inflation expectation in real estate price in the process of formulating monetary policy. Yet in reality there currently exist many obstacles to forming generalized price index including asset price as the final target of monetary policy.Asset price bubble has directly impact on financial system stability, while central bank is the natural undertaker of the responsibility of maintaining financial stability. But the theory and practice have proved there exist the short-term conflicts between the two targets of financial stability and price stability. Overheated real estate industry often makes central bank face the difficult choice between price stability and financial stability. The fifth chapter of the dissertation firstly summarized the theory relative to financial stability, especially to analysis of relationship between financial stability and price stability. Based on this, the dissertation applied all kinds of theories to deeply discuss the impact of real estate price fluctuations on financial stability. And combined with some relative historical cases, the chapter analyzed the relation between real estate price and bank credit using our country's data and the empirical methods of Hodrick Prescott Filter and Granger causality test, so as to reveal the interactive mechanism between real estate cycles and bank crisis. The author founded real estate price fluctuations had significant impact on credit supply, the cycle fluctuations of real estate was antecedent to which of credit supply, and the former had some predictive effect on the latter. Thus it proved our country's real estate price fluctuations had strong impact on the target of central bank maintaining financial stability. Therefore the central bank must pay close attention to the conflicts between two targets.In the our country's current situation of not enough elasticity of exchange rate, the more significant impact on real estate price is from the expectation of exchange rate, not exchange rate itself. On the condition of the expectation of appreciation of the RMB getting more and more intense, the speculation of the international capital is the important cause of inducing real estate price bubble; moreover the monetization of the appreciation pressure on RMB intensifies more excess liquidity. The sixth chapter of the dissertation verified the appreciation expectation on RMB had strong impact on real estate market by the method of grey relation analysis, and analyzed how international capital flow influenced the interaction between exchange rate fluctuations and asset price by using the general equilibrium model in the framework of the NOEM. The chapter also built the extended M—F model including of real estate price to discuss current monetary policy dilemma. Based on the analysis of international experiences and lessons, the author thinks our country should maintain flexible floating exchange rate policy, insist on independency of monetary policy and the active sustainable and progressive way of domestic currency appreciation; strengthen the supervision of short-term speculative capital flow; carry out active fiscal policy, income policy and industrial policy in order to expand domestic demand; cultivate a perfect financial market to provide conditions for exchange rate system reform.To form a complete view, based on analysis of the former chapters, the seventh chapter of the dissertation considered some comprehensive problem, such as how the central bank should pay attention to real estate price, what correction direction of our country's monetary policy framework preventing impact of bubbles on macro economy is, what role the data of real estate market including real estate price should play in the process of monetary policy decision, how the information of real estate price should be effectively utilized and understood, and so on. These are core problems that the dissertation must solve. Based on the impact of real estate price fluctuations on every side of the monetary policy framework, the author thinks that the central bank behoove to react to real estate price, but to pay attention to real estate price, not to peg it, and real estate price should not be as the target of monetary policy, that is to say it should not be brought into loss function of central bank, but be as important information variable that is the constraint condition of loss function. Forward-looking inflation targeting is a flexible monetary policy framework, which can stabilize the asset market at the same time stabilize the other commodity price, and overcome the conflicts between price stability and financial stability in some degrees, meanwhile, avoid the failure of monetary intermediate target of monetary supply for strengthening the efficiency of monetary policy transmission. Therefore our country's monetary policy framework should be transformed into it by creating some conditions. While real estate price information plays the role of leading indicator, and exerts its forecasting function for future inflation and output as forward-looking information variable in inflation forecasting equation. The author applied the method of dynamic optimization to deduce the targeting rule that including asset price information, and considered we urgently needed further exploration of compilation of our country's real estate price index, collection of data sample, determination of real estate reasonable price, and compilation of the warning indices system of bubble, so as to effectively utilizing and understanding real estate price information.