Expansionary Monetary Policy, Land Finance and Real Estate
Speculation
Mouhua Liao
Xiamen University
August 10, 2018
Abstract
Keywords:
JEL classi
cation:
1 Introduction
2 The model
2.1 Environment
Consider a version of overlapping generation models, where agents live for three days. In
each day, a
xed number (Lyt) of young workers is born. Utility of workers comes from the
consumption of a good and housing services. The young worker can choose to live and work in
the rural area, where he can live in the exiting house with a size h. The young worker can also
choose to live and work in the city, where he need to purchase (rent) a house to live. A worker
can not change the choice of location in his whole life. A worker supplies 1 unit of labor in the
location where he lives when he is young and middle aged and none when he is old.
The initial productivity A0 that is used to produce the
nal good is given. Then At is
growing at rate g. Initial capital stock K0 and infrastructure F0 are given. There is
xed
amount of land, N. All decisions are made at the end of each day. In each day t, we normalize
the price of the good to be pt. A house is a durable good and it depreciates at rate H. Hence,
after a young worker purchases some amount of housing, he can consume the housing services
when he is middle aged and then resell it.
In each day, there are two periods. In the daytime, the good is produced and consumption
takes place. In the night, housing is traded. Money is required to purchase the housing. The is
discount between two daytimes.
2.2 Workers in rural area
A workers utility comes from the consumption of the good and housing services. For a young
worker who is born at time t, his life-time utility is
Uat = ln(ca1;t) + ln(c 2;t+1) + (1�)ln�h+ 2 ln(c 3;t+2),
0 0, 00() 1 times value
of land as collateral. In case the local government is not able to pay (the interest of) the load.
The bank can take over the land and sell it in the new housing market. However, this may lead
to lower land (housing) price. Hence, > 1 can be used to provide an insurance to the bank.
2.8 Central government (bank)
There is
xed amount of money, M0, which is determined (e.g, by making transfer to agents)
exogenously. Here, we assume that the central bank can adjust the total money supply by
making loans to or borrow from the commercial bank at the markets deposit interest rate, r0t.
That is, we consider a kind of money policy such that the central bank sets idea deposit interest
rate, r0t. Then the central bank adjusts his lending to the commercial bank to clear the loan
market. Therefore, total money supply in this economy is
Mt = M0 +Mt;R, (6)
where Mt;R is the amount of lending to the commercial bank.
The interest earned on the lending to the commercial bank is transferred to the central
goverment (Mt�1;R)r0t.
The central bank also decides the upper bound fraction of lending to local governments, .
The central government gets the pro
t of local banks, which includes the revenue from
printing money. Since we focus on the e¤ect of ination on housing market, we assume that,
the central government transfer the revenue to the local government.
2.9 Local governments
The local government in each city is run by a mayor. The local government owns the land and
gets the rent from the land. We assume that, because of the incentive system provided by the
central government, the mayor of day t cares about the welfare of the young worker in day t+1,
the stock of infrastructure and the output of the good. Here, the the stock of infrastructure is
taken as an achievements of the mayor. Obviously, the mayor does not care about the welfare
of the future generations. That is, the problem of the mayor is