Income uncertainty and household savings in China

Type Journal Article - Journal of Development Economics
Title Income uncertainty and household savings in China
Author(s)
Volume 105
Publication (Day/Month/Year) 2013
Page numbers 164-177
URL http://prasad.dyson.cornell.edu/doc/JDEPaperChinaSavingsCLP.2013.pdf
Abstract
China's urban household saving rate has increased markedly since the mid-1990s and the age-savings profile has
become U-shaped. To understand these patterns, we analyze a panel of urban Chinese households over the period
1989–2009. We document a sharp increase in income uncertainty, largely due to an increase in the variance in
household income attributed to transitory idiosyncratic shocks. We then calibrate a buffer-stock savings model to
obtain quantitative estimates of the impact of rising household-specific income uncertainty as well as another
shock to household income—the pension reforms that were instituted in the late 1990s. Our calibrations suggest
that rising income uncertainty and pension reforms lead younger and older households, respectively, to raise
their saving rates significantly. These two factors account for two-thirds of the increase in China's urban household
saving rate and the U-shaped age-savings profile.

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