  The traditional monetary transmission mechanism usually views the equity
markets as the monetary reservoir that absorbs over-issued money, but due to
China's unique fiscal and financial system, the real estate sector has become
an "invisible" non-traditional monetary reservoir in China for many years.
First, using data from Chinese housing market and central bank for parameter
estimation, we constructs a dynamic general equilibrium model that includes
fiscal expansion and financial accelerator to reveal the mechanism of monetary
reservoir. An asset can be called a loan product, which worked as financed
asset for local fiscal expansion, as long as it satisfies the following three
conditions: leveraged trading system, balance commitment payment, and the
existence of the utility of local governments. This paper refers to this
mechanism as the monetary reservoir that will push up the premium of loan
product, form asset bubbles and has a significant impact on the effectiveness
of monetary policy. Local governments leverage the sector of the loan product
to obtain short-term growth by influencing the balance sheets of financial
intermediaries through fiscal financing, expenditure and also investment, but
this mechanism undermines the foundations of long-term growth by crowding out
human capital and technological accumulation.
