Land Policy And Economic Fluctuations ——The Case Of China

China’s land market shows its characteristics. First, because local government is taking over arising government spending while getting declining taxation. Hence, land finance has become one of the most important government income and local government relies heavily on it. Second, according to’The Law of Land Administration of the People’s Republic of China’, it is legal for local government to get the land finance as an important source of income. So that local government is able to affect economic fluctuations by adjusting land supply (in area). Third, the year-on-year growth rate of China’s land supply (in area) fluctuates 27 times as much as U.S. So this paper tries to focus on land policy to study the relationship between land supply (in area) and economic fluctuations.This paper consists of six chapters. Chapter 1 is introduction, presenting research background, research objective, research methods, research outline and possible innovation points. Chapter 2 is literature review, which summarizes related papers by developments of RBC theory.By introducing local government agent, we investigate the relationship between China’s land policy and economic fluctuations in Chapter 3. Different from other papers, we focus on land sales (in area) rather than land finance. This chapter answers the following questions:first, land sales (in area) are counter-cyclical. Second, land finance is pro-cyclical. Because China’s government implemented a series of macro-policies such as the "four-trillion plan" during 2008’s financial crisis, so we further interpret the differences of economic pattern before and after 2008 in this chapter. This chapter finds that by counter-cyclical land policy, local government is able to get rid of land finance constraints in booming periods, because tax revenues can ensure a balanced constraint. Arising land price brings down land sales (in area) and cool down firm’s output. So that land market reaches a new equilibrium, which is called the direct effect. By simulation we show that the economy can be recovered in 15 quarters if land policy is implemented. However, it will recover in 25 quarters without land policy. Besides, GDP fluctuations decrease by 64% with land policy, so China is able to withstand financial crisis more efficiently by using land policy.The relative size of the housing sector in China is large and plays an important role in China’s economy. Specifically, the ratio of the total real estate industry to GDP is 11.61%, contributing 47.19% of GDP growth. Chapter 4 investigates the relationship among China’s land policy, housing sector and economic fluctuations. This chapter expands basic model based on Chapter 3 into two channels:direct and indirect channel. Similar to Chapter 3, direct effect means that land is an input of production function and will affect output directly. While indirect channel plays a part by influencing demand of intermediate goods, which will further impact on final goods firm’s output. By way of counterfactual exercises, we find that both channels tend to dampen economic fluctuations in China’s macroeconomy:the combination of both channels works best to bring the economy out of recession; only direct channel works second best, with GDP fluctuations increase by 51%; only indirect channel works third best, with GDP fluctuations increase by 52%; to shut down both channels is the worst, with GDP fluctuations increase by 64%.Chapter 5 explores the relationship between combination of macro policies and China’s economic fluctuations by adding central government agent. Based on Chapter 4, Chapter 5 combines central government’s monetary & fiscal policies and local government’s land policy. This chapter finds that local government implements counter-cyclical land policy while central government carries out counter-cyclical monetary and fiscal policies to control economy. By simulation we show that the combination of the three macro policies works best to bring the economy out of recession; the combination of land and monetary policies works second best; the combination of land and fiscal policies works third best; the combination of monetary and fiscal policies is the worst. GDP fluctuations increase by 12% without fiscal policy, GDP fluctuations increase by 15% without monetary policy, and increase by 42% without land policy.By DSGE model and quantitative analysis, Chapter 6 derives the following suggestions. First, local goverbment should reinforce regulations of China’s land market, and update land policy to adapt to latest circumstances. Second, local government should strengthen regulations of land sales (in area), such as the squares, the structure, exploiting time and so on, which will keep a reasonable land policy. Third, coordination is necessary for central and local governments to do better macro-control. Finally, Chapter 6 points out shortages of this paper and indicates possible directions in the future.