Heterogenous Housing Bubbles and Monetary Policy

Kun Duan; Liya Zhang; Shuyun Chen; Andrew Urquhart

doi:10.1016/j.irfa.2025.104079

Heterogenous Housing Bubbles and Monetary Policy

Kun Duan
, Liya Zhang
, Shuyun Chen
, Andrew Urquhart^*

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Article number	104079
Number of pages	18
Journal	International Review of Financial Analysis
Volume	103
Early online date	22 Mar 2025
DOIs	https://doi.org/10.1016/j.irfa.2025.104079
Publication status	Published - Jul 2025

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 11 Sustainable Cities and Communities

Keywords

Rational bubble
Naive bubble
Monetary policy
Fractional integration

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DuanK2025HeterogeneousFinal published version, 3.27 MBLicence: Creative Commons: Attribution (CC BY)

Cite this

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title = "Heterogenous Housing Bubbles and Monetary Policy",

abstract = "This paper isolates rational and naive bubbles within a unified framework allowing bounded rationality, and studies how monetary policy surprises affect these bubbles{\textquoteright} 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{\textquoteright}s housing bubbles thanks to the nationwide dominance of a rational bubble type.",

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T1 - Heterogenous Housing Bubbles and Monetary Policy

AU - Duan, Kun

AU - Zhang, Liya

AU - Chen, Shuyun

AU - Urquhart, Andrew

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N2 - 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.

AB - 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.

KW - Rational bubble

KW - Naive bubble

KW - Monetary policy

KW - Fractional integration

U2 - 10.1016/j.irfa.2025.104079

DO - 10.1016/j.irfa.2025.104079

M3 - Article

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VL - 103

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

M1 - 104079

ER -

Heterogenous Housing Bubbles and Monetary Policy

Abstract

UN SDGs

Keywords

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