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Economic Slowdown and Housing Dynamics in China: A Tale of Two Investments by Firms

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  • FENG DONG
  • YUMEI GUO
  • YUCHAO PENG
  • ZHIWEI XU

Abstract

We study the housing boom and economic slowdown in China in a dynamic New Keynesian model. The model features a novel channel of firms' dynamic portfolio choice between physical and housing investment. Housing assets earn a positive return and can be used as collateral for the firm's external finances. A negative productivity shock decreases the relative return of production capital, which translates into a housing boom by increasing the firm's housing demand. A rise in house prices then generates competing effects on real investment: it raises the firm's leverage due to the collateral effect and depresses the firm's demand for physical capital because of the crowding‐out effect. After calibrating the model for the Chinese economy, our quantitative exercise suggests the former effect is dominated by the latter, resulting in countercyclical housing prices. The policy analysis shows that the capital subsidization policy targeting house prices performs better than other macro‐economic policies.

Suggested Citation

  • Feng Dong & Yumei Guo & Yuchao Peng & Zhiwei Xu, 2022. "Economic Slowdown and Housing Dynamics in China: A Tale of Two Investments by Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1839-1874, September.
    • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:6:p:1839-1874
    DOI: 10.1111/jmcb.12882
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    References listed on IDEAS

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    Cited by:

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    2. Yin Germaschewski, 2023. "House price volatility in China: Demand versus supply," Economic Inquiry, Western Economic Association International, vol. 61(1), pages 199-220, January.

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