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Abstract
This thesis consists of three essays. In these three essays, I use dynamic stochastic general equilibrium (DSGE) models to address three questions regarding the effects of urbanisation and financial reforms in China.
In the first essay, I develop a DSGE model to research the influence of population on housing price dynamics and apply this model to urban China. I quantitatively measure the contribution of population growth to the housing price trend and the contribution of population shocks to the housing price fluctuations. The empirical results indicate that the ongoing policy to control the population size in large cities in China can decrease the growth rate of housing prices by 0.5% every year, which accounts for 1/10 of the total housing price trend. Furthermore, this policy cannot stabilize housing prices because population shocks have negligible effects on the housing price cycle. Housing technology shocks and housing preference shocks are responsible for most of the housing price fluctuations.
In the second essay, I estimate the interest rate and money supply rules in China and compare the welfare losses in two DSGE models that respectively apply these two monetary policy rules. I find that the ongoing transition from the money supply to interest rate as China's major monetary policy instrument generates lower inflation volatility but higher output volatility. However, if the People's Bank of China allows the interest rate rule to have a slightly positive response to housing prices and uses such an augmented interest rate rule after the transition, the transition could decrease the volatility of both output and inflation.
In the third essay, I use an occasionally binding DSGE model to investigate the effects of deposit rate liberalisation on the transmission mechanism of housing preference shocks and the welfare implications of these effects. I find that in response to positive housing preference shocks, deposit rate liberalisation creates higher fluctuations in loans and smaller fluctuations in inflation and output. However, deposit rate liberalisation does not have obvious effects on the transmission mechanism of negative housing preference shocks. From a welfare perspective, deposit rate liberalisation improves savers' welfare but reduces borrowers' welfare.