The one-child policy and household savings

Type Working Paper
Title The one-child policy and household savings
Publication (Day/Month/Year) 2013
URL One-Child Policy and Household Savings.pdf
We ask how much the advent of the ‘one child policy’ can explain the sharp rise in China’s
household saving rate. In a life-cycle model with endogenous fertility, intergenerational transfers
and human capital accumulation, we show a macroeconomic and a microeconomic channel through
which restrictions in fertility raise aggregate saving. The macro-channel operates through a shift
in the composition of demographics and income across generations. The micro-channel alters saving
behaviour and education decisions at the individual level. A main objective is to quantify these various
channels in the data. Exploiting the birth of twins as an identification strategy, we provide empirical
evidence on the micro-channel, at the same time imputing roughly 40% of the rise in aggregate
household saving rate to the policy since its inception in 1980. More than two-thirds of this rise is
found to be attributed to the micro-channels alone. Our quantitative OLG model can explain from
30% to 55% of the rise in aggregate saving rate; equally important is its implied shift in the level and
shape of the age-saving profile consistent with micro-level estimates from the data.

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