Is housing collateral important to the business cycle? Evidence from China

•We study whether housing collateral is important to the business cycle in China.•Two competing models are tested using Indirect Inference.•The model with housing collateral passed the test.•The output dynamics is dominated by the exogenous spending shock.•Our finding highlights the importance of th...

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Bibliographic Details
Published in:Journal of international money and finance 2020-12, Vol.109, p.102216, Article 102216
Main Authors: Gai, Yue, Minford, Patrick, Ou, Zhirong
Format: Article
Language:English
Subjects:
China
DSGE model
Housing collateral
Housing market
Indirect inference
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Summary:•We study whether housing collateral is important to the business cycle in China.•Two competing models are tested using Indirect Inference.•The model with housing collateral passed the test.•The output dynamics is dominated by the exogenous spending shock.•Our finding highlights the importance of the interest rate channel. This paper investigates whether housing collateral is important to the business cycle in China. We develop two models, one without housing collateral as benchmark and one variant allowing for it. Indirect Inference procedure tests these two models’ compatibility with the data. We find that the benchmark model passes the test, while the collateral model is strongly rejected. According to the benchmark model, shocks from the housing market have limited impact on the Chinese business cycle. By contrast, the exogenous spending shock from government and net exports, the monetary policy shock and the goods-sector cost/productivity shock, all in turn most likely connected to world business cycle shocks (especially the global financial crisis), are found to be the main drivers.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2020.102216