Household Saving, Financial Constraints, and the Current Account in China

Ayse Imrohoroglu and Kai Zhao

No 2018-15, Working papers from University of Connecticut, Department of Economics

Abstract: In this paper, we present a model economy that can account for the changes in the current account balance in China since the early 2000s. Our results suggest that the increase in the household saving rate and tighter financial constraints facing the firms played equally important roles in the increase in the current account surplus until 2008. We argue that inadequate insurance through government programs for the elderly and the decline in family insurance due to the one-child policy led to the increase in the household saving rate especially after 2000 as more and more families with only one child entered the economy. The increase in the saving rate coupled with the financial frictions preventing the increased household saving from being invested in domestic firms resulted in large current account surpluses until 2008. Our results also indicate that the decline in the current account surplus since 2008 was likely to be due to the relaxation of financial constraints facing domestic firms, which was a result of the large-scale fiscal stimulus plan launched by the Chinese government after 2008. These findings imply that the planned increases in China’s public pension coverage are likely to reduce the future current account balances. On the other hand, if financial constraints are tightened back to the pre-stimulus levels; the current account surplus may rise again.

JEL-codes: E00 E20 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-08
New Economics Papers: this item is included in nep-acc, nep-cna, nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: HOUSEHOLD SAVING, FINANCIAL CONSTRAINTS, AND THE CURRENT ACCOUNT IN CHINA (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2018-15

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