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Income uncertainty and household savings in China

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  • Chamon, Marcos
  • Liu, Kai
  • Prasad, Eswar

Abstract

China's urban household saving rate has increased markedly since the mid-1990s and the age-savings profile has become U-shaped. To understand these patterns, we analyze a panel of urban Chinese households over the period 1989–2009. We document a sharp increase in income uncertainty, largely due to an increase in the variance in household income attributed to transitory idiosyncratic shocks. We then calibrate a buffer-stock savings model to obtain quantitative estimates of the impact of rising household-specific income uncertainty as well as another shock to household income—the pension reforms that were instituted in the late 1990s. Our calibrations suggest that rising income uncertainty and pension reforms lead younger and older households, respectively, to raise their saving rates significantly. These two factors account for two-thirds of the increase in China's urban household saving rate and the U-shaped age-savings profile.

Suggested Citation

  • Chamon, Marcos & Liu, Kai & Prasad, Eswar, 2013. "Income uncertainty and household savings in China," Journal of Development Economics, Elsevier, vol. 105(C), pages 164-177.
    • Handle: RePEc:eee:deveco:v:105:y:2013:i:c:p:164-177
    DOI: 10.1016/j.jdeveco.2013.07.014
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    More about this item

    Keywords

    China; Household savings; Income uncertainty; Pension reforms; Buffer-stock savings;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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