Has fiscal expansion inflated house prices in China? Evidence from an estimated DSGE model

Liu, Chunping and Ou, Zhirong ORCID: https://orcid.org/0000-0002-4610-7183 2024. Has fiscal expansion inflated house prices in China? Evidence from an estimated DSGE model. International Review of Economics and Finance 96 (Part A) , 103541. 10.1016/j.iref.2024.103541

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Abstract

We evaluate the impacts of government spending and government investment on the house price dynamics in China during its Great Housing Boom. Government spending is defined as public expenditures on non-productive public goods and services, while government investment is defined as expenditures on productive public capital. By estimating a DSGE model which allows for potential non-separability between government spending and housing in household utility, and a policy feedback rule governing government investment, we find: a) government spending exhibits a crowding-out effect on housing consumption, though empirically it does not affect the housing price much; b) government investment, which exhibits a strong wealth effect on household income and then the demand for houses, affects the housing price positively and substantially; c) both government spending and government investment are effective instruments for stimulating output, but given that government investment can inflate house prices unnecessarily, policy makers who aim to stimulate the economy without destabilising the housing market would be better off utilising government spending.

Item Type:	Article
Date Type:	Published Online
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	1059-0560
Date of First Compliant Deposit:	27 August 2024
Date of Acceptance:	25 August 2024
Last Modified:	10 Sep 2024 09:22
URI:	https://orca.cardiff.ac.uk/id/eprint/171587

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