Endogenous mechanism of money creation in China's real estate market: Financial accelerator effect

We argue that China's housing market volatility is driven by a unique institutional nexus of local government ‘land financing’ and novel central bank monetary policy tools, distinguishing it from Western precedents. Addressing a critical research gap—the amplification role of bank credit creation—we develop a dynamic stochastic general equilibrium model that integrates local government land finance with the transmission of innovative monetary policy within a financial accelerator framework. Our model reveals a powerful feedback loop in which local government fiscal incentives and monetary policy shocks are mutually amplified through the banking system's credit creation process, generating self-reinforcing property price spirals. Crucially, our framework demonstrates the symmetry of this mechanism: a negative housing shock triggers the same accelerator in reverse, propagating a contraction in credit and M2 that poses systemic financial risk. Our study identifies and quantifies this institution-specific financial accelerator and, thus, offers a new framework for understanding the sources of systemic risk in the Chinese economy.