Income Uncertainty and Household Savings in China

40 Pages Posted: 29 Nov 2010  

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Kai Liu

Norwegian School of Economics (NHH)

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

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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.

Keywords: China, household savings, income uncertainty, pension reforms, buffer-stock savings

JEL Classification: D91, J3, E21

Suggested Citation

Chamon, Marcos and Liu, Kai and Prasad, Eswar S., Income Uncertainty and Household Savings in China. IZA Discussion Paper No. 5331. Available at SSRN: https://ssrn.com/abstract=1716126

Marcos Chamon (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
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202-623-5867 (Phone)

Kai Liu

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen
Norway

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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Washington, DC 20036
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NBER ( email )

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IZA Institute of Labor Economics

P.O. Box 7240
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Germany

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