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Understanding The Household Consumption Behavior In Urban China

Author

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  • JIN XU

    (Department of Economics, Huazhong University of Science and Technology, Wuhan 430074, Hubei Province, China)

  • DONGMIN KONG

    (Department of Finance, Huazhong University of Science and Technology, Wuhan 430074, Hubei Province, China)

Abstract

Using the panel urban households’ aggregate data at the province level in China, this paper attempts to identify the source of the rejection of permanent income hypothesis (PIH) in urban households’ consumption. We introduce liquidity constraints, myopia and loss aversion into testable hypotheses and document that: First, the PIH fails in urban China and the consumption is consistent with the liquidity constraints. Second, in regions with the high and moderate economic levels, the consumption behaviors show liquidity constraints in the early period of market-oriented economic reforms (i.e., 1980s). However, with time, the consumption pattern changed to myopia. Third, in region with low economic level, the reverse is observed: a period of myopia gave way to a period of liquidity constraints. Our results suggest that neither myopia nor liquidity constraints are an adequate characterization of consumption in different regions of urban China, and offer clear policy implications for governments who are concerned with boosting the household income and expanding domestic demand.

Suggested Citation

  • 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.
    • Handle: RePEc:wsi:serxxx:v:60:y:2015:i:05:n:s0217590815500629
    DOI: 10.1142/S0217590815500629
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