Quantitative Analysis of the COVID-19 Pandemic Shock to Household Consumption in China |
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Authors: | Lei Ning Yuqin Wang |
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Institution: | 1. Institute for Advanced Research, and Key Laboratory of Mathematical Economics of Ministry of Education, Shanghai University of Finance and Economics, Shanghai 200433, China2. Institute for Advanced Research, and Key Laboratory of Mathematical Economics of Ministry of Education, Shanghai University of Finance and Economics, Shanghai 200433, China |
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Abstract: | We study the impact of the COVID-19 pandemic shock on household consumption in China. Using household survey data, we find that the proportion of liquidity-constrained households increases quickly, but the constraint levels vary across distinct groups. We build a heterogeneous agent life cycle incomplete market model to analyze the long-run and short-run effects of the pandemic shock. The quantitative results reveal a slow recovery of consumption due to three reasons: hiking unemployment rate, declining labor productivity, and worsening income stability. The hiking unemployment rate plays the key role in households’ consumption reduction since it simultaneously leads to a negative income effect and upsurging precautionary saving motives. Our paper highlights the importance of maintaining a stable labor market for faster recovery. |
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Keywords: | COVID-19 pandemic shock household consumption labor market heterogeneousagentmodel liquidity constraint unemployment quantitative analysis |
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