Working Paper: NBER ID: w14546
Authors: Marcos Chamon; Eswar Prasad
Abstract: From 1995 to 2005, the average urban household saving rate in China rose by 7 percentage points, to about one quarter of disposable income. We use household-level data to explain why households are postponing consumption despite rapid income growth. Tracing cohorts over time indicates a virtual absence of consumption smoothing over the life cycle. Saving rates have increased across all demographic groups although the age profile of savings has an unusual pattern in recent years, with younger and older households having relatively high saving rates. We argue that these patterns are best explained by the rising private burden of expenditures on housing, education, and health care. These effects and precautionary motives may have been amplified by financial underdevelopment, as reflected in constraints on borrowing against future income and low returns on financial assets.
Keywords: saving rates; urban households; China; household behavior; financial underdevelopment
JEL Codes: D12; E21; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising household saving rate in urban China (D14) | increased private expenditures on housing, education, and health care (H75) |
| younger households save to prepare for future education costs (D14) | rising household saving rate in urban China (D14) |
| older households save for uncertain health expenditures (D14) | rising household saving rate in urban China (D14) |
| lack of consumption smoothing over the life cycle (D15) | rising household saving rate in urban China (D14) |
| shift from public to private provision of education and health services (H42) | rising household saving rate in urban China (D14) |
| health risks (I12) | saving behavior among older households (D14) |