Empirical Research Of The Relationship Between Housing Prices And China’s Monetary Policy

This paper studies the relationship between housing price and monetary policy ofChina based on two macroeconomic models: Taylor Rule and VAR method. In addition,it also explores the different roles interest rate and M2have played as the media ofmacro policy transmission mechanism. And finally we analyze the usability of interestrate, compared with money supply in China.We first find the potential real outputs during1988-2011domestic statistics byusing HP filter method, then calculate the real output gaps and make relevant policyanalysis. Then the applicability of Taylor Rule in China is discussed, and three singleequation models are built according to Taylor Rule. Through stepwise regression, wefind the most suitable Taylor equation for Chinese. The result shows us that the interestrate according to Taylor rule and the true value are fitting very well, reaction coefficientof short-term nominal interest rate to inflation rate gap is2.27, reaction coefficient toreal output gap is-3.26, the weight of smoothing interest is0.95. Regression coefficientreflects interest rate established by People’s Bank of China (PBC in short) can suppressinflation effectively but perform ineffectively in reducing variation of business cycleand the minus coefficient may intensify the fluctuation of economy, so Taylor Rule isnot the best optimized monetary policy of China at present. In addition, the housingprice as an explanation variable in the regression is insignificant which indicates thathousing price is not considered as the target of PBC’s monetary policy.Then there are two VAR macro models constructed regarding whether the housingprice fluctuates or not. The root modulus reciprocals of both models are less than one,they both pass the stability test. Using the generalized difference method, we makepulse response analysis of short-term interest rate, inflation rate, GDP, M2and housingprices fluctuation. As a result, housing price shocks have no effect on the monetarypolicy as well as long-term economic growth, which strengthens the conclusion thatPBC doesn’t consider housing price as its target when it makes the monetary policies.But in the short run, the pulse of interest rate and M2can lead to the housing pricefluctuations, which implies that monetary policy produces an influence on the housingmarket, so government imposing economical regulation on real estate market throughmonetary policy is reasonable to some extent.Finally, the paper discusses the rationality of China’s current monetary policy which using both money supply and interest rate as its regulating means. We also givesome constructive proposals about building efficient transmission mechanism andliberalization of interest rate in the end.