Heterogeneous housing bubbles and monetary policy

Kun Duan, Liya Zhang, Shuyun Chen and Andrew Urquhart

International Review of Financial Analysis, 2025, vol. 103, issue C

Abstract: This paper isolates rational and naive bubbles within a unified framework allowing bounded rationality, and studies how monetary policy surprises affect these bubbles’ characteristics differently. Employing a comprehensive dataset in urban China, our results demonstrate that both the magnitude and type of housing bubbles evolve across locations over time. Tightening monetary policy is found to exert a containing role in rational bubble dynamics but its role in naive bubbles is less significant. Our results confirm the effectiveness of contractionary monetary policy and home purchase restrictions in combating China’s housing bubbles thanks to the nationwide dominance of a rational bubble type.

Keywords: Rational bubble; Naive bubble; Monetary policy; Fractional integration (search for similar items in EconPapers)
JEL-codes: E52 G14 R30 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:103:y:2025:i:c:s1057521925001668

DOI: 10.1016/j.irfa.2025.104079

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