Political Uncertainty and Household Savings in China

Published on Author paldinoj15

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.


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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

One Response to Political Uncertainty and Household Savings in China

  1. In the short run, a drop in consumer durables will likely show up as a rise in savings. So in which direction does causation run? The disruptions likely affected markets, and political uncertainty could affect “visible” purchases should there be a mass political campaign focused on “leftist” behavior. Their focus is effectively one data point, and they may not have household data, which would make the econometrics of such checks hard to do. The graph of New York Times citations is also a bit strange, as very few Chinese read the NYT, while the Times is also quite limited in its coverage of events in China, particularly outside Beijing (where they have an office). Finally, one of the stimuli for the Tiananmen [天安门] Incident was poor macroeconomic performance, with a slowdown implemented to try to bring down inflation. That is, young people weren’t finding jobs, and their parents and relatives were complaining of high food prices. Such macroeconomic volatility makes controlling for outside factors important, but the more controls you need, the more data you need.

    In any case, an economic slowdown is normally accompanied by a fall in savings as households struggle to make ends meet, while savings rise as the economy recovers (and rise if there is a short-term burst of income, as with temporary “stimulus” tax cuts). It is an interesting topic, and if they find savings rising, and interesting observation / puzzle.

    I assume the authors discuss causation and data issues. Do you find their story compelling, incomprehensible econometric details aside?