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Household Saving, Financial Constraints, and the Current Account in China

Author

Listed:
  • Ayşe İmrohoroğlu

    (University of Southern California)

  • Kai Zhao

    (University of Connecticut)

Abstract

In this paper, we present a model economy that can account for the changes in the current account balance in China since the early 2000s. Our results suggest that the increase in the household saving rate and tighter financial constraints facing the firms played equally important roles in the increase in the current account surplus until 2008. We argue that inadequate insurance through government programs for the elderly and the decline in family insurance due to the one-child policy led to the increase in the household saving rate especially after 2000 as more and more families with only one child entered the economy. The increase in the saving rate coupled with the financial frictions preventing the increased household saving from being invested in domestic firms resulted in large current account surpluses until 2008. Our results also indicate that the decline in the current account surplus since 2008 was likely to be due to the relaxation of financial constraints facing domestic firms, which was a result of the large-scale fiscal stimulus plan launched by the Chinese government after 2008. These findings imply that the planned increases in China’s public pension coverage are likely to reduce the future current account balances. On the other hand, if financial constraints are tightened back to the pre-stimulus levels; the current account surplus may rise again.

Suggested Citation

  • Ayşe İmrohoroğlu & Kai Zhao, 2018. "Household Saving, Financial Constraints, and the Current Account in China," Working papers 2018-15, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2018-15
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    File URL: http://web2.uconn.edu/economics/working/2018-15.pdf
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    References listed on IDEAS

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    1. Nicolas Coeurdacier & Stéphane Guibaud & Keyu Jin, 2015. "Credit Constraints and Growth in a Global Economy," Sciences Po publications info:hdl:2441/169d87l3e88, Sciences Po.
    2. Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2013. "Capital Controls with International Reserve Accumulation: Can This Be Optimal?," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 229-262, July.
    3. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1484-1515.
    4. Chen, Peter & Karabarbounis, Loukas & Neiman, Brent, 2017. "The global rise of corporate saving," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 1-19.
    5. Coeurdacier, Nicolas & Guibaud, Stéphane & Jin, Keyu, 2015. "Credit constraints and growth in a global economy," LSE Research Online Documents on Economics 62016, London School of Economics and Political Science, LSE Library.
    6. İmrohoroğlu, Ayşe & Zhao, Kai, 2018. "The chinese saving rate: Long-term care risks, family insurance, and demographics," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 33-52.
    7. Xing Liu & Shujun Cao, 2007. "Determinants of Corporate Effective Tax Rates: Evidence from Listed Companies in China," Chinese Economy, Taylor & Francis Journals, vol. 40(6), pages 49-67, November.
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    9. Nicolas Coeurdacier & Stéphane Guibaud & Keyu Jin, 2015. "Credit Constraints and Growth in a Global Economy," American Economic Review, American Economic Association, vol. 105(9), pages 2838-2881, September.
    10. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
    11. Kaiji Chen & Ayşe İmrohoroğlu & Selahattin İmrohoroğlu, 2007. "The Japanese saving rate between 1960 and 2000: productivity, policy changes, and demographics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(1), pages 87-104, July.
    12. Zhao, Kai, 2017. "Social insurance, private health insurance and individual welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 102-117.
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    Cited by:

    1. İmrohoroğlu, Ayşe & Zhao, Kai, 2018. "The chinese saving rate: Long-term care risks, family insurance, and demographics," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 33-52.

    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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