COVID-19 Shocks, Monetary Policy, and Real Estate Price Volatility: Analysis Based on a Dynamic Stochastic General Equilibrium Perspective

The COVID-19 pneumonia epidemic in early 2020 severely affected all sectors of the Chinese economy, with economic growth plummeting but the property market continuing to heat up after a brief contraction. How to formulate an effective monetary policy in the face of the COVID-19 shock to achieve stable economic growth while curbing excessive real estate price inflation has become a pressing issue for Chinese policymakers today. To this end, this paper focuses on the impact of two types of monetary policy, price-based and quantity-based, on macro-economic variables such as real estate prices and aggregate output by developing a multi-sectoral DSGE model incorporating the COVID-19 shock and comparing them. The analysis finds that both monetary policy rules can achieve the objective of dampening real estate prices. Nevertheless, while causing the same magnitude of real estate price contraction, quantity-based monetary policy leads to greater volatility in variables such as aggregate output, while other economic variables are less volatile under the price-based monetary policy.