Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 34/2014: Political Uncertainty and Household Savings.

Rolf Aaberge (), Kai Liu () and Yu Zhu ()
Additional contact information
Rolf Aaberge: SSB, Postal: Statistics Norway, Oslo, Norway
Kai Liu: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Yu Zhu: University of Dundee, Postal: Nethergate, Dundee, United Kingdom, DD1 4HN

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.

JEL-codes: D91; E21; J30

30 pages, December 4, 2014

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