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Liquidity constraint, uncertainty and household consumption in China

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  • Yin Zhang
  • Guang Hua Wan

Abstract

This paper investigates the changing roles played by liquidity constraint and uncertainty in accounting for the dynamism of Chinese household consumption behaviour. Starting from the Euler equation-based model of Robert Hall, a framework encompassing an array of consumption models is developed and applied to Chinese data over the period 1961-1998. Empirical results reveal a regime shift in the early 1980s and imply that increases in the proportion of liquidity constrained consumers and increased uncertainty in the post-reform period are responsible for the extremely low consumption or high savings in China. Moreover, it is found that interactions between liquidity constraint and uncertainty reinforce each other's effects and lead to declines in both the level and growth of consumption.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000266991
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 19 ()
Pages: 2221-2229

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Handle: RePEc:taf:applec:v:36:y:2004:i:19:p:2221-2229

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References

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  1. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Feltenstein, Andrew & Lebow, David & van Wijnbergen, Sweder, 1990. "Savings, Commodity Market Rationing, and the Real Rate of Interest in China," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 234-52, May.
  4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  5. Yih-Luan Chyi & Chao-Hsi Huang, 1997. "An empirical study of the 'rule of thumb' consumption model in five East Asian countries," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1271-1282.
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Cited by:
  1. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).
  2. Guangjian Xu & Liyuan Dai & Jipeng Zhong, 2010. "Why Has China’s Final Consumption Rate Declined Since 1978? Causes and Implications," Journal of Family and Economic Issues, Springer, vol. 31(3), pages 338-352, September.
  3. Zhou, Jingkui, 2013. "Uncertainty, inequality and consumption preferences in urban China," Economic Modelling, Elsevier, vol. 31(C), pages 308-322.
  4. Qi, Li & Prime, Penelope B., 2009. "Market reforms and consumption puzzles in China," China Economic Review, Elsevier, vol. 20(3), pages 388-401, September.
  5. Gu, Xinhua & Tam, Pui Sun, 2013. "The saving–growth–inequality triangle in China," Economic Modelling, Elsevier, vol. 33(C), pages 850-857.

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