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Excess Liquidity, Housing Price Booms and Policy Challenges in China
Author(s) -
Guo Shen,
Li Chen
Publication year - 2011
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/j.1749-124x.2011.01267.x
Subject(s) - market liquidity , economics , boom , monetary economics , real estate , inflation (cosmology) , monetary policy , liquidity trap , central bank , liquidity risk , finance , physics , theoretical physics , engineering , environmental engineering
Incorporating asymmetric cost and benefit of supplying excess liquidity into an otherwise standard time inconsistency model, this paper offers an explanation of the excess liquidity and housing price booms recently experienced in China. We find that the central bank's incentive to stimulate economic growth with excess liquidity fuels real estate prices and accelerates inflation bias. Therefore, the central bank should free itself from the pressure to achieve an economic growth rate higher than the potential level, and assign an appropriate weight to the real estate price fluctuations in the central bank's objective function, so that the central bank's policy of stimulating economic growth with excess liquidity can be constrained.