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Income Uncertainty and Household Savings in China

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  • Kai Liu
  • Marcos Chamon
  • Eswar Prasad

Abstract

China's household saving rate has increased markedly since the mid-1990s and the age-savings profile has become U-shaped. We find that rising income uncertainty and pension reforms help explain both of these phenomena. Using a panel of Chinese households covering the period 1989-2006, we document that strong average income growth has been accompanied by a substantial increase in income uncertainty. Interestingly, the permanent variance of household income remains stable while it is the transitory variance that rises sharply. A calibration of a buffer-stock savings model indicates that rising savings rates among younger households are consistent with rising income uncertainty and higher saving rates among older households are consistent with a decline in the pension replacement ratio for those retiring after 1997. We conclude that rising income uncertainty and pension reforms can account for over half of the increase in the urban household savings rate in China since the mid-1990s as well as the U-shaped age-profile of savings.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/289.

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Length: 30
Date of creation: 01 Dec 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/289

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Keywords: Pension reforms; Aging; Economic models; External shocks; Income distribution; Private savings; Wages;

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References

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Guest Post: The puzzle of Chinaâ??s rising household saving rate
    by Yves Smith in Naked capitalism on 2011-01-18 07:55:54
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Cited by:
  1. Malhar Nabar, 2011. "Targets, Interest Rates, and Household Saving in Urban China," IMF Working Papers 11/223, International Monetary Fund.
  2. Mu, Ren & Du, Yang, 2012. "Pension Coverage for Parents and Educational Investment in Children: Evidence from Urban China," IZA Discussion Papers 6797, Institute for the Study of Labor (IZA).
  3. Xin Wang & Yi Wen, 2012. "Housing prices and the high Chinese saving rate puzzle," Working Papers 2012-038, Federal Reserve Bank of St. Louis.
  4. Sengupta, Rajeswari & Aizenman, Joshua, 2010. "Global imbalances: Is Germany the new China? A skeptical view," MPRA Paper 25578, University Library of Munich, Germany.
  5. Ito, Hiro & Volz, Ulrich, 2012. "The People’s Republic of China and Global Imbalances from a View of Sectorial Reforms," ADBI Working Papers 393, Asian Development Bank Institute.
  6. Chadwick C. Curtis & Steven Lugauer & Nelson C. Mark, 2011. "Demographic Patterns and Household Saving in China," NBER Working Papers 16828, National Bureau of Economic Research, Inc.
  7. Joseph Fan & Randall Morck & Bernard Yeung, 2011. "Capitalizing China," NBER Working Papers 17687, National Bureau of Economic Research, Inc.
  8. Jin Feng & Lixin He & Hiroshi Sato, 2009. "Public Pension and Household Saving: Evidence from urban China," Global COE Hi-Stat Discussion Paper Series gd08-030, Institute of Economic Research, Hitotsubashi University.
  9. Joseph P. H. Fan & Randall Morck & Bernard Yeung, 2011. "Translating Market Socialism with Chinese Characteristics into Sustained Prosperity," NBER Chapters, in: Capitalizing China, pages 1-32 National Bureau of Economic Research, Inc.
  10. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
  11. Prasad, Eswar & Ye, Lei (Sandy), 2012. "The Renminbi's Role in the Global Monetary System," IZA Discussion Papers 6335, Institute for the Study of Labor (IZA).

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