Consumption demand, saving behaviour and rational expectations: an application of disequilibrium modelling to China 1952-92

Xiao-Ming Li

Applied Economics, 1997, vol. 29, issue 11, 1411-1424

Abstract: In explaining dramatic changes in Chinese household savings and money demand behaviour in the reform period, previous studies proposed and tested three different hypotheses. However, no effort has been made to distinguish quantitatively between forced and voluntary savings in terms of their quanta, reasons and effects; the role of rational expectations in determining household behaviour has not received proper attention; and a puzzle of high domestic savings ratio accompanied by low interest rates still remains to be solved. This paper adopts a disequilibrium framework capable of investigating these issues. Our research yields some interesting and important results. Its findings support the conjecture that both regime shifts and repressed inflation have contributed to the rapidly rising personal money balances during the reform period, with the former being a dominant factor. It is shown that household voluntary savings can be well explained by official interest rates; only forced savings and instantaneous excess demand matter in affecting market prices, and thus monetary overhang is not so unsettling as some economists would think; and expectations do play a certain role in influencing household savings behaviour.

Date: 1997
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DOI: 10.1080/000368497326246

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