Monetary Policy, Hot Money and Housing Price Growth Across Chinese Cities

Abstract

We use a dynamic hierarchical factor model to identify the national, regional, and local factors of the city-level housing price growth in China from 2005 to 2015. During the zero-lower-bound (ZLB) episode in the U.S., local factors account for 78% of variations in the month-on-month city-level housing price growth. However, as the time horizon gets longer and longer, the national factor gets a larger and larger variance share. When the horizon is extended to half a year, the variance share of the national factor reaches 51%. This indicates that the city-level housing price growth in China is more of a national wide phenomenon in recent years. We then use a VAR model to investigate the driving forces of the national factor and find that monetary policy and hot money shocks can affect the national housing price growth significantly. A positive monetary policy shock has a significant negative impact on the national factor, which lasts for more than two years. A positive hot money shock does cause a significant increase in the national factor. However, this effect is transitory and gets reversed in half a year. Our analysis indicates that the reversed effect of hot money shocks and the negative impact of positive price shocks on the national factor result from the tightening of monetary policy triggered by these shocks.

Keywords: housing price, monetary policy, hot money, dynamic factor model

JEL Classification: E43, E52, E58, F32, R31, C11, C32