Money Supply And Real Estate Prices: Theoretical Hypotheses And Empirical Tests

How to realize the equilibrium of the money market, and keep kinds of price steady, including consumable price and assets price, has been the key problem of macro-finance. The history of many countries, especially the experience of the U.S. in 1990's indicated that low inflation rate was not the sufficient condition to keep the asset price at suitable level. In recent years, the inflation of asset price, especially the inflation of real estate price has attracted much attention. There may be some relationship between liquidity and asset price. So, the relationship between money supply and housing price has been the object of this research.This paper first analyzes the feature of the concept and classification of housing market, and amends the"Stock-Flow"model which was brought by Hanusheck and Quigley (1979), then gets the equations which are used to determine the housing price and stock. The solution of the equations shows that, for any exogenous interest rate and aggregate income, it always exits the equilibrium housing price and stock, and if other factors keep constant, the equilibrium housing price will rise if the interest rate decreases and aggregate income increases. If the equilibrium price rises, the equilibrium stock will rise as well.Then, after the qualitative analysis on the interaction mechanism of housing price and money supply, the author considers the real estate market into"IS-LM"model and amends the model. The author discusses the model under two conditions: exogenous money supply and endogenetic money supply. Although the dynamic adjusting processes of money market and housing market under different condition are vary, finally there are equilibrium interest rate, money supply stock, housing price and housing stock. This means, there is an equilibrium relationship between money supply and housing price in the long term, and the interaction between them is positive. The yield of housing increase will lead the money supply increase.The empirical test on Chinese data justifies the theory. The result of the empirical test indicates that Chinese money supply, M2, is endogenetic, it cannot completely controlled by the Central Bank, and the money multiplier is influenced by the yield of housing. It exits a long term positive equilibrium relationship between money supply (M0, M2) and housing price. Such relationship also exits between yield of housing and money multiplier. Moreover, this paper creates the VEC model to get the short term dynamic relationship between money supply and housing price. At last, the author gives some policy suggestions.