Summary:
In China, land is not only an important factor of production, but also a major source of income for local governments. As a result, changes in the price of land can have significant macroeconomic effects. Local governments can manage their lands to raise money for local construction, and thus promote local economic development. However, some local governments are overly reliant on land revenue and form a community of interest with real estate developers, which not only pushes up land prices, but also restricts public decision-making and ultimately hinders local economic development. At the same time, changes in land prices are highly correlated with fluctuations in the macroeconomy. The rapid growth of China's economy has often been accompanied by high land prices, and the economy is usually in a downward trend when the price of land falls. The cost of land is also an important component of the price of housing, which is a strong determinant of people's livelihoods. Given the important role that land plays in China's economy, it is unlikely that a modern financial system and stable real estate market can be achieved without a major reform of the land market. Hence, the factors and mechanisms that drive the fluctuations in the land prices under the land finance system need to be identified to provide theoretical and practical measures for improving people's livelihoods, promoting the reform of the fiscal and tax systems, and implementing a long-term housing mechanism. In this paper, we introduce the land finance and implicit government guarantee financing mechanism into a new Keynesian DSGE model that includes a financial accelerator, and investigate the characteristics, factors, and mechanism driving the fluctuation in land prices under the land finance system. Specifically, our model includes families, entrepreneurs, the central bank, and the government as variables. In the model, infrastructure is included as an essential production input, and the government is the main supplier of infrastructure. The revenue for infrastructure investment is not only derived from tax revenue, but also from land sales, land mortgage loans, and implicit guarantee financing with government credit, which are the main characteristics of the local government investment and financing in China. We then use quarterly macro-economic data on China's economy from 2004 to 2016 to calibrate and estimate the model using Bayesian estimation. The main results of this paper are as follows. First, in terms of the historical variance, the land price fluctuations in China from 2004 to 2016 were greatly affected by the land demand, land supply, and monetary policy shocks. Second, the variance decomposition shows that in the short term (within one quarter), the land prices were mainly affected by the land supply, with the land supply shock explaining 49.87% of the land price fluctuations, followed by the monetary policy shock (24.52%) and the land demand shock (23.43%). However, in the long term, the land demand shock becomes the decisive factor in determining the land prices, explaining almost 42.11% of the land price fluctuation. Third, we further investigate the relationship between the land prices and macroeconomic fluctuations, and examine the amplification mechanism of land finance. We find that a positive land demand shock pushes up the land prices and causes macroeconomic fluctuations through the mortgage constraint mechanism. This paper makes the following contributions to the literature. First, we consider the important impact of monetary policy on the land market using a sticky new Keynesian DSGE model. Second, we include the characteristics of China's land finance in the model, and depict the investment and financing characteristics of the “land sales for income, land pledges for loans” by China's local governments. Third, this paper also describes the characteristics of the implicit guarantee financing scheme with government credit, which together with the local government borrowing based on land pledges, constitutes the implicit debt of the local governments.
闫先东, 张鹏辉. 土地价格、土地财政与宏观经济波动[J]. 金融研究, 2019, 471(9): 1-18.
YAN Xiandong, ZHANG Penghui. Land Prices, Land Finance, and Macroeconomic Fluctuations. Journal of Financial Research, 2019, 471(9): 1-18.
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