Does money supply drive housing prices in China

Abstract This study explores the causality between housing prices and money supply in order to support the dynamic equilibrium model in China. Considering structural changes, the long-run nexus using full-sample data is found to be unstable, suggesting the causality test is not reliable. Instead a time-varying rolling-window approach is employed to revisit the dynamic causal relationship. The results highlight the existence of a bidirectional causal link between housing prices and money supply in China. Specifically, soar and crash of housing prices manifest both positive and negative impacts on money supply in different sub-periods. In turn, money supply has a positive impact on housing prices, which supports the dynamic equilibrium model. In order to support a relatively stable housing price level, especially during structural economic changes, it is critical to facilitate the pegged money supply precautionary control and insure a reasonable and stable level of money supply into the real estate market.