On the Chinese housing market and business cycles---A study based on a Bayesian dynamic stochastic general equilibrium model

The Chinese housing industry has been growing quickly since the housing market reform was initiated in 1998 and has now become a pillar of the economy. Developments in the housing industry are highly correlated with other industries in China such as finance, iron and steel, mechanics, services, chemistry, and non-ferrous metal. Thus, fluctuations in the housing industry may have significant impacts on the overall economy through these related industries. Additionally, the rapid increase in housing prices raises concerns about a greater occurrence of asset bubbles. This dissertation addresses several issues related to the development of the Chinese housing sector and the business cycle. It examines: i) the driving forces behind movements in the housing sector and business cycle over the past few decades; ii) the spillover effects of the housing sector volatility on the broader economy; iii) the monetary policy response to fluctuations in the housing prices. A Bayesian estimated dynamic stochastic general equilibrium model is used to explore these issues in an empirical way. The model includes a variety of frictions and shocks used in previous literature as well as three additional housing-related shocks: a housing bubble shock, a government policy shock and a credit shock. The three shocks capture a few important characteristics of the Chinese economy and the housing sector. Estimation results show that investment-specific technology shocks and labor supply shocks account for much of the macroeconomic variations over the whole sample. Although government policy shocks are the dominant force driving market movements, the housing bubble shocks, housing preference shocks and monetary policy shocks also play significant roles, especially the housing bubble shock. Moreover, housing-related shocks also impact the rest of the economy. A counterfactual experiment in which the housing-related shocks are shut down was conducted to further explore the spillover effects of the housing sector on the overall economy. The outcome shows that without these shocks the variances of selected variables are significantly reduced which suggests that the housing sector can generate volatility on the whole economy. Finally, the dissertation evaluates the optimal monetary policy and compares the loss functions of the Central Bank under different policy regimes. According to the results of frontier efficiency curves and the model's marginal likelihoods, the Chinese Central Bank should moderately respond to housing price fluctuations. The estimation results in the dissertation are robust to changes in the structural parameters and the model specifications.