CHEN Chuanglian;DAI Mingxiao
Institute of Finance and College of Economics, Jinan University;Institute of Finance and College of Economics, Jinan University
Summary: High asset prices, especially high house prices and high leverage, are two important issues that affect China’s future economic growth and financial stability. For this reason, the central bank established macro-prudential monetary policies to stabilize the financial market beginning in the third quarter of 2009. This paper constructs a partial equilibrium model of house prices and credit leverage, then examines and analyzes the dynamic effectiveness of price-oriented and quantity-oriented monetary policy rules on deleveraging and adjusting house prices from a time-varying perspective. Furthermore, due to the strong endogenous relationships between the leverage cycle, house prices, and monetary policy, we propose a time-varying parameter structural vector autoregressive model to effectively capture the feedback relationship between endogenous variables during 1996 Q1 to 2016 Q4. The estimated results show that the monetary policy preference of quantity versus price rules targeting the leverage cycle adjusted over this period, while both monetary policies had a significant preference for targeting house prices that began during the subprime crisis. Furthermore, quantity-oriented monetary policies were more effective in controlling house prices and leverage rates. Therefore, the central bank should further strengthen the policy enforcement of quantity-oriented monetary policy targeting both the leverage cycle and asset prices, and should also activate the role of price-oriented monetary policy in deleveraging. The transmission channel by which interest rates influence asset prices through capital costs is not effective, which further restricts the role and effectiveness of price-oriented monetary policy in controlling asset prices. In addition, the parameter of price-oriented monetary policy targeting leverage has not always remained positive in the long run. The price-oriented monetary policy has only a short-term effect of regulating and controlling the two types of targets, while it lacks a long-term persistent effect. One major reason is that many policies do not have long-term coherence; another is that authorities lack guidance of people to have reasonable expectations of house prices. Therefore, ensuring that long-term policy remains consistent and cultivating people’s rational expectation (even reverse expectation) of house prices are important conditions for improving the transmission effectiveness of monetary policy. Moreover, because the quantity-oriented monetary policy is more effective in controlling house prices and leverage, preventing the bursting of the asset price bubble and an outbreak of systemic risk under high leverage which would endanger the real economy and require the central bank to strengthen the quantity-oriented monetary policy of targeting the two types of goals. In addition, the central bank needs to improve the price guidance function of the monetary market, which can further enhance the effectiveness of price-oriented monetary policy in influencing asset prices and the leverage cycle. This paper makes three contributions. First, we construct a partial equilibrium model of house prices and credit leverage to explain the micro-mechanism of quantity-oriented versus price-oriented monetary policies on house price and leverage dynamics. This model can effectively identify and capture the dynamic feedback relationship between endogenous variables. Second, through back stepping from a time-varying parameter vector auto regression model, we can derive a time-varying parameter structural vector auto regression model to accurately estimate the time-varying parameters of both price-oriented and quantity-oriented monetary policies targeting the leverage cycle and asset prices, and then analyze the strengths and evolution of monetary policy in regulating and controlling both types of targets. Third, this paper uses dynamic analysis methods to identify and investigate the targeting degree and effectiveness of both price-oriented and quantity-oriented monetary policies on the leverage cycle and asset prices in different periods in a time-varying framework in China. Finally, we propose several constructive policy suggestions based on our conclusions, which should allow authorities to deal with deleveraging and controlling house prices in different economic stages.
monetary policy;leverage cycle;credit-to-GDP gap;time-varying parameters