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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: 34
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; pension; pension reform; retirement; survey; calibration; replacement rate; statistics; measurement error; labor income; measurement errors; probability; standard errors; pensions; retirement age; retirement period; retirement savings; surveys; social pension; pension regime; discrete change; covariance; probabilities; correlation; retirement income; pension system; individual retirement; pension formula; stochastic process; optimization; standard deviations; bootstrap; empirical estimation; national accounts; replacement rates; retirement accounts; public pension; calibrations; pension liabilities; individual retirement accounts; sampling; data analysis; time series; econometrics; life expectancy; polynomial; retirement consumption; individual accounts; lower pension; sample size; retirement saving;

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References

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  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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