Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107469
Authors: 
Aaberge, Rolf
Liu, Kai
Zhu, Yu
Year of Publication: 
2014
Series/Report no.: 
IZA Discussion Papers 8692
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.
Subjects: 
China
household savings
political uncertainty
JEL: 
D91
J3
E21
Document Type: 
Working Paper

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