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Political Uncertainty and Household Savings

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  • Aaberge, Rolf

    () (Statistics Norway)

  • Liu, Kai

    () (University of Cambridge)

  • Zhu, Yu

    () (University of Dundee)

Abstract

Despite macroeconomic evidence pointing to a negative aggregate consumption response due to political uncertainty, few papers have used microeconomic panel data to analyze how households adjust their consumption after an uncertainty shock. We study household savings and expenditure adjustment from an unexpected, large-scale and rapidly evolving political shock that occurred largely in May 1989 in Beijing, China. Using monthly micro panel data, we present evidence that a surge in political uncertainty resulted in significant temporary increases in savings among urban households in China. Households responded mainly by reducing semi-durable expenditure and frequency of major durable adjustment. The uncertainty effect is more pronounced among older, wealthier, and more socially advantaged households. We interpret our findings using existing models of precautionary behavior. By focusing on time variation in uncertainty, our identification strategy avoids many of the potential problems in empirical studies of precautionary savings such as self-selection and life-cycle effects.

Suggested Citation

  • Aaberge, Rolf & Liu, Kai & Zhu, Yu, 2014. "Political Uncertainty and Household Savings," IZA Discussion Papers 8692, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp8692
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    References listed on IDEAS

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    More about this item

    Keywords

    China; household savings; political uncertainty;

    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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