Income Uncertainty and Household Savings in China

39 Pages Posted: 6 Dec 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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Date Written: December 2010

Abstract

China's household saving rate has increased markedly since the mid-1990s and the age-savings profile has become U-shaped during the 2000s. We find that rising income uncertainty and pension reforms help explain both of these phenomena. Using a panel of Chinese households covering the period 1989-2006, we document that strong average income growth has been accompanied by a substantial increase in income uncertainty. Interestingly, the permanent variance of household income remains stable while it is the transitory variance that rises sharply. A calibration of a buffer-stock savings model indicates that rising savings rates among younger households are consistent with rising income uncertainty and higher saving rates among older households are consistent with a decline in the pension replacement ratio for those retiring after 1997. We conclude that rising income uncertainty and pension reforms can account for over half of the increase in the urban household savings rate in China since the mid-1990s as well as the U-shaped age-saving profile.

Suggested Citation

Chamon, Marcos and Liu, Kai and Prasad, Eswar S., Income Uncertainty and Household Savings in China (December 2010). NBER Working Paper No. w16565. Available at SSRN: https://ssrn.com/abstract=1719926

Marcos Chamon (Contact Author)

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

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Washington, DC 20431
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Kai Liu

Norwegian School of Economics (NHH) ( email )

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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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NBER ( email )

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IZA Institute of Labor Economics

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Germany

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