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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.

Suggested Citation

  • Yin Zhang & Guang Hua Wan, 2004. "Liquidity constraint, uncertainty and household consumption in China," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2221-2229.
    • Handle: RePEc:taf:applec:v:36:y:2004:i:19:p:2221-2229
    DOI: 10.1080/0003684042000266991
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    Cited by:

    1. Lunbi Wu, 2020. "Can Liquidity Constraints Explain the Differences of Growth Across Countries?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-6.
    2. Riccardo Cristadoro & Daniela Marconi, 2012. "Household savings in China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 10(3), pages 275-299, November.
    3. 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.
    4. 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).
    5. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    6. Cancheng Hong & Di He & Ting Ren, 2023. "The Impact of Commercial Medical Insurance Participation on Household Debt," Sustainability, MDPI, vol. 15(2), pages 1-17, January.
    7. Wu, Weixing & Zhao, Jing, 2022. "Economic policy uncertainty and household consumption: Evidence from Chinese households," Journal of Asian Economics, Elsevier, vol. 79(C).
    8. Ding, Yibing & Liu, Ziyu & Liu, Dayu, 2022. "Structural news shock, financial market uncertainty and China's business fluctuations," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    9. Julius Mukarati & Itumeleng P. Mongale & Godswill Makombe, 2020. "Land redistribution and the South African economy," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 66(1), pages 46-54.
    10. Qi, Li & Prime, Penelope B., 2009. "Market reforms and consumption puzzles in China," China Economic Review, Elsevier, vol. 20(3), pages 388-401, September.
    11. Li, Changsheng & Lin, Liqiong & Gan, Christopher E.C., 2016. "China credit constraints and rural households’ consumption expenditure," Finance Research Letters, Elsevier, vol. 19(C), pages 158-164.
    12. Hongyun Han & Fan Si, 2020. "How Does the Composition of Asset Portfolios Affect Household Consumption: Evidence from China Based on Micro Data," Sustainability, MDPI, vol. 12(7), pages 1-17, April.
    13. Zhang, Yumei & Wang, Xinxin & Chen, Kevin, 2012. "Growth and Distributive Effects of Public Infrastructure Investments in China," Conference papers 332234, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    14. Jin Xu & Dongmin Kong, 2015. "Understanding The Household Consumption Behavior In Urban China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(05), pages 1-21, December.
    15. N'Diaye, Papa & Zhang, Ping & Zhang, Wenlang, 2010. "Structural reform, intra-regional trade, and medium-term growth prospects of East Asia and the Pacific--Perspectives from a new multi-region model," Journal of Asian Economics, Elsevier, vol. 21(1), pages 20-36, February.
    16. Gu, Xinhua & Tam, Pui Sun, 2013. "The saving–growth–inequality triangle in China," Economic Modelling, Elsevier, vol. 33(C), pages 850-857.
    17. Zhou, Jingkui, 2013. "Uncertainty, inequality and consumption preferences in urban China," Economic Modelling, Elsevier, vol. 31(C), pages 308-322.
    18. He, Rong & Li, Heqing & Lian, Zeng & Zheng, Jie, 2020. "The effect of culture on consumption: A behavioral approach," Journal of Asian Economics, Elsevier, vol. 67(C).
    19. Zhou, Xianbo & Sun, Yucheng & Tao, Ying, 2023. "Does Digital Finance Upgrade Trickle-down consumption effect in China?," Economic Modelling, Elsevier, vol. 118(C).

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