Housing prices and business cycle in China: A DSGE analysis

We investigate the interaction between the real estate market and the business cycle volatility in China over the past two decades. A Bayesian dynamic stochastic general equilibrium (DSGE) model with nominal stickiness and collateral constraints is estimated. It is found that shocks from the housing market (e.g., loan-to-value ratio and housing preference shocks) affect the macroeconomy of China. The interactive feedback between credit constraints and housing prices amplifies the impact of various economic shocks, which plays an important role in explaining the business cycle volatility in China.