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Targets, Interest Rates, and Household Saving in Urban China

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  • Malhar Nabar
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    Abstract

    This paper studies a panel of China''s provinces over the period 1996-2009 during which urban household saving rates increased from 19 percent of disposable income to 30 percent. It finds that the increase in urban saving rates is negatively associated with the decline in real interest rates over this period. This negative association suggests that Chinese households save with a target level of saving in mind. When the return to saving declines (increases), it becomes more difficult (easier) to meet a target and households increase (lower) their saving out of current disposable income to compensate. The results are robust across specifications and to the inclusion of additional variables. A main policy implication is that an increase in real deposit rates may help lower household saving and boost domestic consumption.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/223.

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    Length: 29
    Date of creation: 01 Oct 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/223

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    Related research

    Keywords: Bank reforms; Banks; Interest rates; Private consumption; Private investment; Private savings; real interest rate; real interest rates; disposable income; inflation; nominal interest rate; household income; current disposable income; current consumption; inflation rate; income growth; capital account; substitution effect; household consumption; future consumption; income effect; consumer durables; annual inflation; consumption levels; consumption choice; consumption growth; lifetime income; nominal rate of return; labor income; consumption level; government spending; consumption decisions; consumption expenditure; consumption function; real rates; rate of inflation; real returns; desired consumption;

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    1. Giles, John T. & Mu, Ren, 2006. "Elder Parent Health and the Migration Decision of Adult Children: Evidence from Rural China," IZA Discussion Papers 2333, Institute for the Study of Labor (IZA).
    2. Nicoletta Batini & Papa N'Diaye & Alessandro Rebucci, 2005. "The domestic and global impact of Japan’s policies for growth," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
    3. Marcos Chamon & Kai Liu & Eswar S. Prasad, 2010. "Income Uncertainty and Household Savings in China," NBER Working Papers 16565, National Bureau of Economic Research, Inc.
    4. Shang-Jin Wei & Xiaobo Zhang, 2011. "The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(3), pages 511 - 564.
    5. Marcos Chamon & Eswar Prasad, 2008. "Why are Saving Rates of Urban Households in China Rising?," NBER Working Papers 14546, National Bureau of Economic Research, Inc.
    6. Laxton, Douglas & N'Diaye, Papa & Pesenti, Paolo, 2006. "Deflationary shocks and monetary rules: An open-economy scenario analysis," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 665-698, December.
    7. Olivier Blanchard & Francesco Giavazzi, 2006. "Rebalancing Growth in China: A Three-Handed Approach," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(4), pages 1-20.
    8. International Monetary Fund, 2009. "Interest Rate Liberalization in China," IMF Working Papers 09/171, International Monetary Fund.
    9. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 42(1), pages 145-170, March.
    10. Cai, Fang & Giles, John & Meng, Xin, 2006. "How well do children insure parents against low retirement income? An analysis using survey data from urban China," Journal of Public Economics, Elsevier, Elsevier, vol. 90(12), pages 2229-2255, December.
    11. John Giles & Kyeongwon Yoo, 2007. "Precautionary Behavior, Migrant Networks, and Household Consumption Decisions: An Empirical Analysis Using Household Panel Data from Rural China," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 534-551, August.
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    Cited by:
    1. Bussière, Matthieu & Kalantzis, Yannick & Lafarguette, Romain & Sicular, Terry, 2013. "Understanding household savings in China: the role of the housing market and borrowing constraints," MPRA Paper 44611, University Library of Munich, Germany.

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