An empirical analysis of income disparity and consumption in China |
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Authors: | Feng Lou Xuesong Li |
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Institution: | Institute of Quantitative & Technical Economics, Chinese Academy of Social Sciences, Beijing 100732, China |
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Abstract: | Using China’s provincial data from 1991 to 2005, this paper analyzes the impact of urban income disparity on their consumption
based on static and dynamic panel data models and state space model. The GMM and Kalman Filter methods are used in the estimation
and the variables such as income and price are controlled. The empirical results show that the elasticity of permanent income
to consumption is much higher than that of temporary income; and the impact of income disparity on consumption is negative
and substantial. A rise of 0.01 in the absolute value of Gini coefficient will cause a reduction of 0.35% in consumption on
average. The effects fluctuate with the change of economic structure, consumption expectation and economic cycle. In the beginning
years of 1990s, it is positive to enlarge income disparity moderately for consumption. It is the year of 1996 that the negative
effect first appears in China. During 1998–2004, an increase of 0.01 to the absolute value of Gini coefficient will result
in the reduction of consumption to fluctuate between 0.37% and 0.54%. In order to enlarge domestic demand and promote consumption,
the focus should be the improvement of permanent income instead of temporary income, and the vigorous policies to reduce income
disparity. |
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Keywords: | income disparity consumption panel data analysis state space model |
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