Born Like China, Growing Like China

23 Pages Posted: 22 May 2019

See all articles by Jeannine Bailliu

Jeannine Bailliu

Bank of Canada

Mark Kruger

Government of Canada - Bank of Canada

Argyn Toktamyssov

affiliation not provided to SSRN

Wheaton Welbourn

Government of Canada - Bank of Canada

Date Written: May 2019

Abstract

This paper studies the effects of China's one‐child policy on saving and foreign reserve accumulation. Fertility control increases the saving rate both by altering saving decisions at the household level, and by altering the demographic composition of the population at the aggregate level. I show that demographically induced changes in saving explain the build‐up of a large foreign surplus in China. As in Song, Storesletten, and Zilibtti (2011), the model features contractual and financial market imperfections. Government‐owned firms are less productive but have full access to the credit market. Entrepreneurial firms are more productive but face credit constraints. As labour switches from less productive to more productive firms, demand for domestic bank borrowing decreases. As saving increases while demand for loans decreases, domestic savings are invested abroad, generating a foreign surplus. The model predicts that China's foreign reserve accumulation will soon begin to slow down in response to recent relaxation of the one‐child policy.

Suggested Citation

Bailliu, Jeannine and Kruger, Mark and Toktamyssov, Argyn and Welbourn, Wheaton, Born Like China, Growing Like China (May 2019). Pacific Economic Review, Vol. 24, Issue 2, pp. 325-347, 2019, Available at SSRN: https://ssrn.com/abstract=3391980 or http://dx.doi.org/10.1111/1468-0106.12258

Jeannine Bailliu (Contact Author)

Bank of Canada ( email )

Ottawa, Ontario K1A 0G9
Canada
613-782-7474 (Phone)
613-782-7658 (Fax)

Mark Kruger

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Argyn Toktamyssov

affiliation not provided to SSRN

Wheaton Welbourn

Government of Canada - Bank of Canada

234 Wellington Street
Ontario, K1A 0G9
Canada

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