Political uncertainty and household savings |
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| Institution: | 1. Faculty of Economics, University of Cambridge, United Kingdom;2. Economic Studies, University of Dundee, United Kingdom;3. Research Department, Statistics Norway, Norway;4. IZA, Germany;5. ESOP, University of Oslo, Norway;1. University Paris-Dauphine, PSL Research University, 75016 Paris, France;2. Toulouse School of Economics, University of Toulouse Capitole, Toulouse, France;1. ICREA Research Professor, Universitat Pompeu Fabra, Barcelona IPEG, Barcelona GSE, Spain;2. New Economic School, Russia;3. Professor of Economics and Political Science, and Gorter Family Professor of Islamic Studies, Duke University, USA;4. Research Scholar, Stanford Center for International Development, Stanford Institute for Economic Policy Research, Stanford University, USA |
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| Abstract: | 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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