Housing Price Volatility,Leverage Constraints And Optimal Monetary Policy

In order to deal with sub-prime mortgage crisis in 2008,Chinese government had announced a 4 trillion RMB stimulus package in 2008,which helped it prevent a rapid increase in unemployment and sharp slowdown in economic growth.However,this stimulus package and corresponding aggressive monetary policy triggered a huge surge in house prices and general inflation.In this paper,we revisit the driving force of housing prices dynamics,make out whether monetary policy has reacted to housing price,and further discuss the optimal monetary policy for China's economy by building,estimating and simulating a DSGE model featuring household heterogeneity,leverage constraints for household and producer,nominal debt and nominal stickiness.The estimation exercise is performed by applying Bayesian methods over two model setting,and counterfactual simulations are implemented to find optimal monetary policy.Our main findings can be summarized as follows.First,our estimates results show that the central bank in China(PBoC)did not react to house price in the sample periods.Second,the housing demand shock and price markup shock mostly make positive contribution to the housing price during the sample period.The investment-specific shock has a negative contribution to housing price fluctuations.Housing price in the model that its monetary policy responds to housing price has an overall less fluctuation by the shocks than the model without responding to housing price,implying that monetary policy response to housing prnce would stabilize the fluctuation in housing price.Third,two monetary policy regimes are introduced to study the optimal monetary policy.As for Regime 1(reacting to output and inflation),the households would prefer a large response to the output and inflation which can stabilize the fluctuation of consumption and housing,I while for the intermediate goods producer and the social,it is an over-reaction resulting a welfare loss.Besides,the social optimal rules imply a Pareto improvement relative to baseline regime.For Regime 2(reacting to output,inflation,and housing price),all the welfare-maximizing choices are welfare loss relative to the baseline regime from the viewpoint of intermediate goods producer and the social,while all the choices would bring welfare gain to the borrower and saver.In addition,Regime 2 does not imply a Pareto improvement with respect to baseline Regime.In fact,the borrower and saver are better off,but the intermediate goods producer is worse off.In the end,in order to relieve the supply and demand contradiction in real estate market,dredge the monetary policy transmission channel,construct regulation framework suitable for our economic structure,we need to deepen the reform further in real estate market and interest rate market,perfect the construction of indemnificatory housing,strengthen the "two pillar"framework of regulation underpinned by monetary policy and macro-prudential policy.