Abstract:
We formulate a dynamic stochastic general equilibrium framework to analyze the effect of local government's land finance on China's economic fluctuation. We estimate the model using Bayesian method and identify that housing demand shock is the main driving force behind real estate market volatility. Then we show that local government's land finance amplifies the volatility in real estate market on the one hand, and propagates it to real economy to amplify the volatility of consumption, investment and output on the other hand. Impulse responses from the model match the VAR evidence. This process can cause social welfare loss which positively relates to the dependence of local government on land finance.We argue that land supply policy implemented by the government can be used to alleviate it.
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