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Political Uncertainty and Household Savings

Aaberge, Rolf; Liu, Kai; Zhu, Yu
Working paper
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http://hdl.handle.net/11250/227064
Utgivelsesdato
2014-12
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  • Discussion papers (SAM) [586]
Sammendrag
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.
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Discussion paper;34/14

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