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Does money supply drive housing prices in China?

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  • Su, Chi-Wei
  • Wang, Xiao-Qing
  • Tao, Ran
  • Chang, Hsu-Ling

Abstract

This study explores the causality between housing prices and money supply in order to support the dynamic equilibrium model in China. Considering structural changes, the long-run nexus using full-sample data is found to be unstable, suggesting the causality test is not reliable. Instead a time-varying rolling-window approach is employed to revisit the dynamic causal relationship. The results highlight the existence of a bidirectional causal link between housing prices and money supply in China. Specifically, soar and crash of housing prices manifest both positive and negative impacts on money supply in different sub-periods. In turn, money supply has a positive impact on housing prices, which supports the dynamic equilibrium model. In order to support a relatively stable housing price level, especially during structural economic changes, it is critical to facilitate the pegged money supply precautionary control and insure a reasonable and stable level of money supply into the real estate market.

Suggested Citation

  • Su, Chi-Wei & Wang, Xiao-Qing & Tao, Ran & Chang, Hsu-Ling, 2019. "Does money supply drive housing prices in China?," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 85-94.
    • Handle: RePEc:eee:reveco:v:60:y:2019:i:c:p:85-94
    DOI: 10.1016/j.iref.2018.12.013
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