Political Uncertainty and Household Savings

38 Pages Posted: 23 Jan 2015

See all articles by Rolf Aaberge

Rolf Aaberge

Statistics Norway; Institute for the Study of Labor (IZA); Deaprtment of Economics

Liu Kai

Norwegian School of Economics (NHH)

Yu Zhu

University of Dundee

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2014

Abstract

Despite macroeconomic evidence pointing to a negative aggregate consumption response due to political uncertainty, few papers have used microeconomic panel data to analyze how households adjust their consumption after an uncertainty shock. We study household savings and expenditure adjustment from an unexpected, large-scale and rapidly evolving political shock that occurred largely in May 1989 in Beijing, China. Using monthly micro panel data, we present evidence that a surge in political uncertainty resulted in significant temporary increases in savings among urban households in China. Households responded mainly by reducing semi-durable expenditure and frequency of major durable adjustment. The uncertainty effect is more pronounced among older, wealthier, and more socially advantaged households. We interpret our findings using existing models of precautionary behavior. By focusing on time variation in uncertainty, our identification strategy avoids many of the potential problems in empirical studies of precautionary savings such as self-selection and life-cycle effects.

Keywords: China, household savings, political uncertainty

JEL Classification: D91, J3, E21

Suggested Citation

Aaberge, Rolf and Kai, Liu and Zhu, Yu, Political Uncertainty and Household Savings (December 4, 2014). NHH Dept. of Economics Discussion Paper No. 34/2014, Available at SSRN: https://ssrn.com/abstract=2553807 or http://dx.doi.org/10.2139/ssrn.2553807

Rolf Aaberge

Statistics Norway ( email )

N-0033 Oslo
Norway

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Deaprtment of Economics ( email )

Norway

Liu Kai (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Yu Zhu

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom

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