Saving, growth and financial market imperfections in transitional China : simulation analysis and empirical investigation

轉型中國下的儲蓄, 增長與金融市場不完美性 : 模擬分析與實證研究

Student thesis: Master's Thesis

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  • Liling FENG

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Awarding Institution
Award date3 Oct 2006


To understand the relationship between saving, growth and financial market imperfections, simulations and empirical studies are conducted in this thesis. We first calibrate the impacts on saving by simulation of China’s transitory high income growth during the reform period and its demographic changes due to the abnormal high birth rate from the 1950’s to the late 1970’s, which are the two most important factors that dominate the development of the Chinese economy nowadays. The basic Overlapping Life Cycle model is revised to better match China’s reality. Based on the revised model several economies are simulated using different combinations of the real income growth rate, real birth rate, TFP growth rate and worldwide average birth rate. Our results show that China’s transitory high income growth together with abnormal birth rate can to a large extent explain the upward trend and fluctuation of China’s saving rate. Using Random-Coefficient Model, we fit the panel data from 30 provinces to the rule-of-thumb model proposed by Campbell and Mankiw (1989) and find that about 66.7 percent consumers in the urban areas and 59 percent consumers in the rural areas are liquidity constrained. Moreover the empirical results indicate great discrepancy among provinces both for the urban areas and rural areas concerning the severity of liquidity constraints. To understand the underlying reasons behind China’s liquidity constraints, we also analyze the potential relationship between the liquidity constraints and some real economic proxies. We find that provinces with extremely high or low income per capita suffer more liquidity constraints, and liquidity constrains tend to increase as the ratio of state-owned financial institutions transaction over GDP goes up. Geographic analysis shows that the liquidity constraints show regional pattern. Specifically, in the urban areas, the northwestern region and the middle region are more the liquidity-constrained than the southwestern and the coastal region except for a few exceptions. The situation is the opposite for the rural case. Based on the estimate of the severity of liquidity constraints we evaluate the impacts of liquidity constraints on saving rate and find that liquidity constraints tend to smooth the saving rate. Following Jappelli and Pagano (1994) the welfare effect and growth effect of liquidity constraints are evaluated. Our analysis of the welfare and growth effects of liquidity constraints might show positive impacts on the economic growth and the welfare level of some generations in the short run. But in the long run the impacts of liquidity constraints on both welfare and economic growth disappear.

    Research areas

  • Saving and investment, China, Capital market