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Can income inequality explain China’s saving puzzle?

Author

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  • Chu, Tianshu
  • Wen, Qiang

Abstract

Since the beginning of 21st century, China has experienced increasing aggregate saving rates as well as increasing income inequality simultaneously. In this paper, we explore the possible linkage between rising saving rates and rising income inequality. We first characterize China’s saving behavior using household survey data, finding that households with high income save at higher rates. We then derive analytically that the saving rate relates with income inequality index in a nonlinear way, in particular, the aggregate saving rate is a linear function of interaction term of the average income level and squared income inequality indicator, and the level value of average income. We conduct median regression analysis using community level data, finding that aggregate saving rates are increasing in income inequality, in particular, the higher the income inequality, the greater the marginal effect of income inequality on aggregate saving rates. This research has policy implication that the effective way to promote China’s domestic demand is through promoting a more equal distribution of income.

Suggested Citation

  • Chu, Tianshu & Wen, Qiang, 2017. "Can income inequality explain China’s saving puzzle?," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 222-235.
    • Handle: RePEc:eee:reveco:v:52:y:2017:i:c:p:222-235
    DOI: 10.1016/j.iref.2017.01.010
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    Cited by:

    1. Fuzhong Chen & Guohai Jiang & Mengyi Gu, 2021. "Household savings and subjective wellbeing: Evidence from China," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(4), pages 1489-1504, December.
    2. Song, Zhongchen & Coupé, Tom & Reed, W. Robert, 2021. "Estimating the effect of the one-child policy on Chinese household savings - Evidence from an Oaxaca decomposition," China Economic Review, Elsevier, vol. 66(C).
    3. Tan, Jing & Xu, Hao & Yu, Jingwen, 2022. "The effect of homeownership on migrant household savings: Evidence from the removal of home purchase restrictions in China," Economic Modelling, Elsevier, vol. 106(C).
    4. Xin, Xinyi & Zhang, Anquan & Liu, Lu, 2024. "Study on the influence of Internet finance on urban household savings rate: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 90(C), pages 45-61.

    More about this item

    Keywords

    Income inequality; Aggregate saving rates; Median regression;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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