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Does money supply growth drive housing boom in China? A wavelet-based analysis

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Abstract

This paper provides new insights into the dynamic relationships between money supply growth and housing boom, through the application of wavelet analysis. Specifically, in the time domain, the results highlight the existence of positive co-movement and causality between money supply growth and housing returns, during different sub-periods. In the frequency domain, the co-movements occur especially over the short and medium term. Our results are basically in line with the general equilibrium model developed by Frankel (Am J Agric Econ 68:344–348, 1986) and Li (The theory and empirical research on housing price overshooting under the impact of money supply in China, 2012). After controlling for the simultaneous impact of inflation and interest rates, the correlations become considerably strong in the short term since the early 2000s, which proves for an increasingly close interaction between money supply growth and real estate market. The results provide further evidence of the value of steady money supply growth for the maintenance of healthy and effective operation of the real estate market. Moreover, appropriate signal released by monetary authorities is rapidly assimilated by the real estate market, which highlights that policy adjustments should focus on the short term horizons in order to improve policy pertinence and flexibility.

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Authors and Affiliations

  1. Department of Finance, Ocean University of China, Qingdao, China

    Xiao-Qing Wang

  2. School of Business, Liaocheng University, Liaocheng, China

    Lin-Na Hao

  3. Qingdao Municipal Center for Disease Control and Prevention, Qingdao, China

    Ran Tao

  4. School of Economics, Qingdao University, 308 Ningxia Road, Qingdao, Shandong, China

    Chi-Wei Su

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  1. Xiao-Qing Wang
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Wang, XQ., Hao, LN., Tao, R. et al. Does money supply growth drive housing boom in China? A wavelet-based analysis. J Hous and the Built Environ 35, 125–141 (2020). https://doi.org/10.1007/s10901-019-09668-w

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