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China’s High Savings Rate Puzzle: Role of Precautionary Saving
Yao Dongmin (姚东旻)1* , Xu Yixuan (许艺煊) 2 and Zhang Pengyuan (张鹏远)3
1,3 Center For China Fiscal Development , Central University of Finance and Economics (CUFE), Beijing, China
2 School of Economics, Renmin University of China (RUC), Beijing
Abstract:Academics have yet to agree on the effectiveness of the precautionary saving theory in explaining Chinese households’ saving behavior. With the Wenchuan megaearthquake of 2008 as an uncertain event to overcome the endogeneity problem of income volatility, this paper puts forward a brand-new hypothesis that “an earthquake influences household saving rate through its effects on expected income and the variance of expected income.” Then, we employ propensity score matching – difference-in-differences (PSMDID) method, the systematic GMM methods, the synthetic control method, together with instrumental variable method, for an analysis of Chinese Household Income Project (CHIP) and inter-provincial data at the micro and macro levels, respectively. We find that the Wenchuan mega-earthquake was followed by an increase in the variance of household expected income in Sichuan and a significant rise in the household saving rate. Second, social protection is negatively correlated with expected income, and has a significant substitutive relationship with saving rate. This finding indirectly proves that the earthquake’s impact on the household saving rate is subject to the variance of expected income, shedding light on how the precautionary saving motivation works in the real world.
Keywords:precautionary saving, income uncertainty, household savings rate, natural disaster
JEL Classification Codes: D14, E21, H53
DOI: 10.19602/j .chinaeconomist.2020.09.07
