Monetary Policy and Borrowing Constraint of Housing Market-a Comparative Research Between China and U.S.A.

Since 2006, U.S.A. has witnessed the ups and downs of its economy caused by the bubble of the housing market. Due to China’s unique law, only enterprises can use properties as collateral to borrow from banks, resulting in emphasis on borrowing constraint of the enterprises. When housing price can change value of the collateral and borrowing ability of the enterprises, monetary authority is motivated to stabilize the housing price. Studies show that if the Loan to Value ratio (LTV) of the enterprises’ real estate loans is too high, risk would rise due to borrowing constraints. When housing price becomes lower, wrong monetary policy may continue to lower housing prices, causing great damages to enterprises’ balance sheet in recession. We conduct simulation research of China by DSGE (Dynamic Stochastic General Equilibrium) model in comparison with that of U.S.A., finding that China’s economy is more stable than economy of U.S.A.. One important reason is that the entrepreneurs in China are more constrained than those of USA which results in less risk in the economy. With negative monetary shock, besides markup, other economic variables fall, especially debt and housing price. This means that borrowing constraint is also a financial accelerator. Monetary authority should take into account the borrowing constraint of loans backed by real estate.