precautionary saving of chinese and u.s. households · 1050 massachusetts avenue cambridge, ma...

NBER WORKING PAPER SERIES

PRECAUTIONARY SAVING OF CHINESE AND U.S. HOUSEHOLDS

Horag ChoiSteven LugauerNelson C. Mark

Working Paper 20527http://www.nber.org/papers/w20527

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138September 2014

The views expressed herein are those of the authors and do not necessarily reflect the views of theNational Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.

© 2014 by Horag Choi, Steven Lugauer, and Nelson C. Mark. All rights reserved. Short sections oftext, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit,including © notice, is given to the source.

Precautionary Saving of Chinese and U.S. HouseholdsHorag Choi, Steven Lugauer, and Nelson C. MarkNBER Working Paper No. 20527September 2014JEL No. E21,F4

ABSTRACT

We employ a model of precautionary saving to study why household saving rates are so high in Chinaand so low in the US. The use of recursive preferences gives a convenient decomposition of savinginto precautionary and non precautionary components. This decomposition indicates that over 80 percentof China's saving rate and nearly all of the US saving arises from the precautionary motive. The differencein the income growth rate between China and the US is vastly more important for explaining savingrate differences than differences in income risk. We estimate the preference parameters and find thatChinese and US households are more similar in their attitude toward risk than in their intertemporalsubstitutability of consumption.

Horag ChoiDepartment of EconomicsMonash University900 Dandenong RoadCaulfield East, VIC [email protected]

Steven LugauerEconomics and EconometricsUniversity of Notre Dame443 Flanner HallNotre Dame, IN [email protected]

Nelson C. MarkDepartment of EconomicsUniversity of Notre Dame434 FlannerNotre Dame, IN 46556and [email protected]

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Figure 1: Historical Saving Rates

26

Figure 2: Impulse Responses to Transitory Income Shock

(a) Income (b) Consumption

(c) Assets (d) Saving-Income Ratio

27

Figure 3: Impulse Responses to Permanent Income Shock

(a) Income (b) Consumption

(c) Assets (d) Saving-Income Ratio

28

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