The business cycle implications of land financing in China

- This paper examines the impacts of land financing on business cycle fluctuations in China in an estimated DSGE model.
- The overall effect of land financing is to increase the business cycle fluctuations by 12.6%.
- Land financing could amplify the business cycle fluctuations when shocks generate procyclical land prices and land sales.
- Cutting the direct linkage between the government expenditure and the land sales mitigates the business cycle fluctuations.

In the past decade, the Chinese government was increasingly relying on revenues from land sales to finance the public spending. This paper examines the impacts of land financing on business cycle fluctuations in China in an estimated DSGE model. The simulation results indicate that the overall effect of land financing is to increase the business cycle fluctuations by 12.6%. However, the impacts of land financing on business cycle fluctuations depend on shocks hitting the economy. The policy implication of this paper is that cutting the direct linkage between the government expenditure and the land sales could mitigate the business cycle fluctuations.