Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)
Political Uncertainty and Household Savings.
(), Kai Liu
() and Yu Zhu
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.; (follow links to similar papers)
JEL-Codes: D91; E21; J30; (follow links to similar papers)
30 pages, December 4, 2014
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