Political uncertainty and household savings

Rolf Aaberge, Kai Liu (Lead / Corresponding author), Yu Zhu

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    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.
    Original languageEnglish
    Pages (from-to)154-170
    Number of pages17
    JournalJournal of Comparative Economics
    Volume45
    Issue number1
    Early online date7 Jan 2016
    DOIs
    Publication statusPublished - Feb 2017

    Keywords

    • China
    • Household savings
    • Political uncertainty

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