Capital flows, money supply and property prices: The case of China

Taguchi, Hiroyuki and Tian, Lina (2017): Capital flows, money supply and property prices: The case of China.

Abstract

This article examines the interaction among capital flows, money supply and property prices with a focus of Chinese economy by using a vector auto-regression (VAR) estimation as an analytical framework. The key research questions were, first, whether money supply has been determined independently from capital flows, and then which factor, capital flows or money supply, has given a dominant effect on property prices. The contributions of this study are to investigate the impacts on property prices jointly from capital flows as an external factor and from money supply as a domestic factor, and to count on the differences in the trends in property prices of seventy regional cities in China. The main findings through the VAR estimations were as follows. First, domestic money supply has been determined exclusively from external capital flows through the authority’s perfect sterilization of foreign-exchange-market intervention. Second, the main contributor to property prices’ movement has been domestic money supply rather than external capital flows. Third, some deviations of property prices from the trend in money supply were found in big cities and/or coastal advanced cities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital flows, Money supply, Property prices, China, Seventy reginal cities, Vector auto-regression estimation
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Bhargava, A. (1986). On the theory of testing for unit roots in observed time series, Review of Economic Studies, 53, 369–384.

Blanchard, O., Dell’Ariccia, G. and Mauro, P. (2010). Rethinking macroeconomic policy, IMF Staff Position Note, SPN/10/03.

Caballero, R. and Krishnamurthy, A. (2006). Bubbles and capital flow volatility: Causes and risk management, Journal of Monetary Economics, 53, 35–53.

Calvo, G., and Reinhart, C. (2002). Fear of floating, Quarterly Journal of Economics, 117, 2, 379–408.

Chinn, M.D. and Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions, Journal of Development Economics, 81, 1, 163-192.

Deng, Y.I. (2010). An empirical study on the influence of “Hot Money” on China’s asset prices, Modern Economic Science, 04.

Kim, S., and Yang, D.Y. (2009). Do capital inflows matter to asset prices? The case of Korea, Asian Economic Journal, 23, 3, 323–348.

Kim, S., and Yang, D.Y. (2011). The impact of capital inflows on asset prices in emerging Asian economies: is too much money chasing too little good? Open Economies Review, 22, 2, 293–15.

Koivu, T. (2012). Monetary policy, asset prices and consumption in China, Economic System, 36, 2, 207-325.

Levin, A., Lin, C.F. and Chu, C. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties, Journal of Econometrics, 108, 1–24.

Mankiw, G. (2007). Macroeconomics (sixth edition). Worth Publishers: New York.

Ng, S. and Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power, Econometrica, 69, 6, 1519–1554.

Phillips, P. and Perron, P. (1988). Testing for unit root in time series regression, Biometrika, 74, 335–346.

Taguchi, H. Sahoo, P. and Nataraj, G. (2015). Capital flows and asset prices: Empirical evidence from emerging and developing economies, International Economics, 141, 1-14.

Tillmann, P. (2012). Capital inflows and asset prices: evidence from emerging Asia, IMFS working paper series, 58.

Wang, C., Cui, Y., Wang, Z. and Yin, S. (2007). Empirical research on the relationship between real estate price fluctuation and foreign money inflow, Chinese Business Review, 6, 4, 9-14.

Xu, X.E. and Chen, T. (2012). The effect of monetary policy on real estate price growth in China, Pacific-Basin Finance Journal, 20, 1, 62-77.

Yao, S. Luo, D. and Loh, L. (2013). On China’s monetary policy and asset prices, Applied Financial Economics, 23, 5, 377-392.