Job Market Paper
Liquidity Constraint, Transition Dynamics, and the Chinese Housing Return Premium1
Home price movements received increasing academic and public attention in recent years. In this paper, I propose a novel explanation for large housing booms in emerging markets that highlights the effect of household wealth accumulation on housing prices under liquidity constraints, using the recent Chinese housing boom as an example.
In China, housing prices grew 170 percent during 2003-2012 in real terms. Returns on housing commanded a twelve percent premium annually over the risk-free rate. Across Chinese cities, increase in the value of housing is closely associated with increase in household wealth, whether measured with or without housing.
I argue that the high Chinese housing return premium results from an upward transition in household wealth from a low initial condition, interacted with liquidity constraints: Low initial household wealth, under liquidity constraints, limits housing prices to be low in 2003; but as household wealth quickly rise aided by high household savings, housing prices also quickly increase.
I assess the quantitative plausibility of this explanation using an otherwise standard consumption-housing two-asset dynamic portfolio choice model, augmented with realistic liquidity constraints and low initial wealth, with housing priced in industry equilibrium. This model matches the high housing return premium, and explains 92 percent of the observed increase in housing prices.
This model also generates other intriguing predictions, including an investment motive that helps explain the high Chinese household saving rate puzzle, as well as that a permanent slowdown in Chinese economic growth might only lead to a temporary dip in Chinese housing prices. The analysis in this paper also provide insights to understand other episodes in emerging housing markets for which there are both liquidity constraints and a low initial household wealth.
Standard life-cycle incomplete-markets models predict large cross-sectional differences for age and wealth in agents’ consumption responses to long-lasting income shocks. Whether these predictions hold in the data is an open question.
Using household microdata for the US, I document economically important age and wealth cross-sectional heterogeneity in the the adjustment of nondurable consumption in the face of long-lasting income shocks. In response to labor-income shocks that last at least three years, households with heads younger than 50 adjust consumption by twice as much as others. Households with less liquid wealth than median adjust consumption by twice as much as others.
A calibrated standard life-cycle incomplete-markets model predicts heterogeneity in consumption responses that are quantitatively similar to empirical estimates.
Work in Progress
Transmission of Monetary Policy in High Frequency: Evidence from Loan-Level Data in China (with Cheng Sun)
We study the transmission of monetary policy across time, space, industry, and other firm characteristics, leveraging a unique highly-detailed, daily-frequency dataset on all loans approved and all loan applications from a major commercial bank in China. The dataset accounts for 15 percent of the flow of all loans issued nationwide. Under a common trend assumption, we estimate high-frequency impulse responses of bank credit to monetary policy changes for firms in different regions, industries, and firms of different size and ownership. Preliminary results show large differences in both the timing and the magnitude of the responses. We build a model with heterogeneous firms to try to (1) understand the differential timing and magnitude of the responses to monetary policy, and to (2) quantify the aggregate impact of the differential rollout of monetary policy across firm characteristics.