Housing demand or money supply? A new Keynesian dynamic stochastic general equilibrium model on China’s housing market fluctuations

• We investigate the key driving force of housing price fluctuations in China using DSGE.
• We compare the role of housing demand shock and money supply shock.
• Housing demand instead of money supply drives China’s housing price.
• A house price-augmented money supply rule is suggested for China’s housing policy.

There is a bitter controversy over what drives the housing price in China in the existing literature. In this paper, we investigate the underlying driving force behind housing price fluctuations in China, especially focusing on the role of housing demand shock with that of money supply shock in explaining housing price movements, by a new Keynesian dynamic stochastic general equilibrium model. Empirical results suggest that it is housing demand, instead of money supply, that mainly drives China’s housing price movements. Relevant policy implication is further discussed, namely, whether to consider the housing price fluctuations in the conduct of monetary policy. By means of the policy simulations, we find that a real house price-augmented money supply rule is a better monetary policy for China’s economy stabilization.