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What drives urban consumption in mainland China? The role of property price dynamics

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  • Chen, Yu-Fu

    ()
    (BOFIT)

  • Funke, Michael

    (BOFIT)

  • Mehrotra, Aaron

    ()
    (BOFIT)

Abstract

This paper adds to the literature on wealth effects on consumption by disentangling house price effects on consumption for mainland China. In a stochastic modelling framework, the riskiness, rate of increase and persistence of house price movements have different implications for the consumption/housing ratio. We exploit the geographical variation in property prices by using a quarterly city-level panel dataset for the period 1998Q1 – 2009Q4 and rely on a panel error correction model. Overall, the results suggest a significant long run impact of property prices on consumption. They also broadly confirm the predictions from the theoretical model.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/DP1311.pdf
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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 13/2011.

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Length: 35 pages
Date of creation: 21 Jun 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_013

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Keywords: consumption; house prices; China; panel data;

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References

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  1. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 79-113, July.
  2. Karl E. Case, John M. Quigley, Robert J. Shiller., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Economics Working Papers, University of California at Berkeley E01-308, University of California at Berkeley.
  3. John D. Benjamin & Peter Chinloy & G. Donald Jud, 2004. "Real Estate Versus Financial Wealth in Consumption," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 29(3), pages 341-354, November.
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  5. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1371-95, November.
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  7. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
  8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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  12. Koivu, Tuuli, 2010. "Monetary policy, asset prices and consumption in China," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 18/2010, Bank of Finland, Institute for Economies in Transition.
  13. Slacalek Jiri, 2009. "What Drives Personal Consumption? The Role of Housing and Financial Wealth," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 9(1), pages 1-37, October.
  14. Bostic, Raphael & Gabriel, Stuart & Painter, Gary, 2009. "Housing wealth, financial wealth, and consumption: New evidence from micro data," Regional Science and Urban Economics, Elsevier, vol. 39(1), pages 79-89, January.
  15. LokSang Ho & Gary Wong, 2008. "Nexus Between Housing And The Macro Economy: The Hong Kong Case," Pacific Economic Review, Wiley Blackwell, vol. 13(2), pages 223-239, 05.
  16. Chen, Yu-Fu & Funke, Michael & Mehrotra, Aaron, 2011. "What drives urban consumption in mainland China? The role of property price dynamics," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 13/2011, Bank of Finland, Institute for Economies in Transition.
  17. Andreas Lehnert, 2004. "Housing, consumption, and credit constraints," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-63, Board of Governors of the Federal Reserve System (U.S.).
  18. Jie Gan, 2010. "Housing Wealth and Consumption Growth: Evidence from a Large Panel of Households," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2229-2267, June.
  19. Joanne Cutler, 2004. "The Relationship between Consumption, Income and Wealth in Hong Kong," Working Papers 012004, Hong Kong Institute for Monetary Research.
  20. Hiebert, Paul & Roma, Moreno, 2010. "Relative house price dynamics across euro area and US cities: convergence or divergence?," Working Paper Series, European Central Bank 1206, European Central Bank.
  21. Marjorie Flavin & Shinobu Nakagawa, 2008. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence," American Economic Review, American Economic Association, vol. 98(1), pages 474-95, March.
  22. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  23. Koivu, Tuuli, 2010. "Monetary policy, asset prices and consumption in China," Working Paper Series, European Central Bank 1240, European Central Bank.
  24. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series, European Central Bank 1283, European Central Bank.
  25. International Monetary Fund, 2010. "Are House Prices Rising too Fast in China?," IMF Working Papers 10/274, International Monetary Fund.
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Cited by:
  1. Funke, Michael & Chen, Xi, 2012. "Real-time warning signs of emerging and collapsing Chinese house price bubbles," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 27/2012, Bank of Finland, Institute for Economies in Transition.
  2. Chen, Yu-Fu & Funke, Michael & Mehrotra, Aaron, 2011. "What drives urban consumption in mainland China? The role of property price dynamics," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 13/2011, Bank of Finland, Institute for Economies in Transition.
  3. Bussière, Matthieu & Kalantzis, Yannick & Lafarguette, Romain & Sicular, Terry, 2013. "Understanding household savings in China: the role of the housing market and borrowing constraints," MPRA Paper 44611, University Library of Munich, Germany.

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