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Real estate expansion and the effectiveness of monetary policy: Evidence from China

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  • Xu, Yuan
  • Qi, Yudong
  • Tan, Haoyan

Abstract

This paper examines how the real estate sector shapes the effectiveness of monetary policy in stimulating the real economy, employing a state-dependent local projection method on panel data from 31 Chinese provinces between 2000 and 2019. The findings reveal that excessive expansion of the real estate sector significantly weakens the stimulative effects of monetary easing, and this result is robust across alternative specifications. Mechanism analysis points to two channels: a liquidity competition effect, whereby real estate crowds out credit available to the real economy, and a financial friction effect, whereby shadow banking expansion substitutes for traditional credit channels. Moreover, the offsetting impact of real estate is found to be more pronounced in the less developed central and western provinces, underscoring the heterogeneity of monetary transmission across regions.

Suggested Citation

  • Xu, Yuan & Qi, Yudong & Tan, Haoyan, 2026. "Real estate expansion and the effectiveness of monetary policy: Evidence from China," Finance Research Letters, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:finlet:v:88:y:2026:i:c:s1544612325024067
    DOI: 10.1016/j.frl.2025.109157
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