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

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Liu, C. ORCID: 0000-0003-3770-4821 and Ou, Z., 2024. Has fiscal expansion inflated house prices in China? Evidence from an estimated DSGE model. International Review of Economics and Finance. ISSN 1059-0560 (Forthcoming)

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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:

Journal article

Publication Title:

International Review of Economics and Finance

Creators:

Liu, C. and Ou, Z.

Publisher:

Elsevier

Date:

26 August 2024

ISSN:

1059-0560