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Income Uncertainty and Household Savings in China

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  • Chamon, Marcos

    (International Monetary Fund)

  • Liu, Kai

    (University of Cambridge)

  • Prasad, Eswar

    (Cornell University)

Abstract

China's household saving rate has increased markedly since the mid-1990s and the age-saving profile has become U-shaped. Using a panel of urban Chinese households covering 1989-2006, we document a sharp increase in income uncertainty. While the permanent variance of household income was stable, the transitory variance rose sharply. Based on these estimates, we calibrate a buffer-stock savings model and show that rising income uncertainty and pension reforms lead younger and older households, respectively, to raise their saving rates. These two factors account for over half of the increase in China's urban household savings rate and the U-shaped age-profile of savings.

Suggested Citation

  • Chamon, Marcos & Liu, Kai & Prasad, Eswar, 2010. "Income Uncertainty and Household Savings in China," IZA Discussion Papers 5331, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5331
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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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