The Impact of Monetary Policy on Housing Prices in China

Abstract

This paper examines the impact of monetary policy on housing prices in China with a VAR model. Granger causality tests, impulse response functions, and variance decompositions are used to analyze the impacts of two monetary policy variables, market-based short-term interest rates and money supply, on housing prices. The results show that a contractionary monetary policy will cause the growth rate of housing prices to decline in China. In particular, a positive shock to market-based interest rates measured by the 7-day interbank offered rate has a significant and negative effect on housing prices in a range from five months to one and a half years after the shock takes place. However, our paper finds no evidence that supports the significant impact from money supply on housing prices. The results of our paper imply that the market-based short-term interest rates are effective monetary policy instruments for the central bank in China to conduct its policy to affect housing prices.