Across the globe political shocks have far-reaching economic consequences. Following the 9/11 terrorist attacks in the U.S. retail sales dropped by 2.5% in September. In their paper, Political Uncertainty and Household Savings (2014), Aaberge et al. examine the effect of the large-scale political shock known as the “Tian’anmen Square Movement” on household consumption. This movement was triggered by the death of a former leader in mid-April 1989 and resulted in a change in political leadership and wide-scale reform.
Consider the dramatic increase in newspaper articles regarding China and uncertainty seen in May and early June in the graph above. It demonstrates the increase in political uncertainty in China surrounding the Tian’anmen Square Movement, and Aaberge et al. find that this uncertainty was followed by a temporary increase in savings among Chinese households. Their, “estimates also suggest [that] the channel through which this increase in savings is achieved [is]… reductions in semi-durable and frequency of major durable adjustment.” This increase in savings is more pronounced in wealthier, older, and more socially advantage households. Ultimately, the findings of this paper indicate that uncertainty is costly. While this particular case in China was temporary, “in situations of prolonged political turmoil, the impact of household consumption is likely to be greater.”
Source (paraphrased throughout):
Aaberge, Rolf, Liu, Kai, and Zhu, Yu (2014). Political Uncertainty and Household Savings (Discussion Paper No. 793). Retrieved from Statistics Norway, Research Department website: http://www.ssb.no/en/forskning/discussion-papers/_attachment/210837?_ts=14a2f279578