Consumption and aggregate constraints: new evidence from Chinese provinces

Abstract

Using a newly created panel dataset at the provincial level in China, this article revisits the hypothesis that state-specific consumption exhibits less sensitivity to lagged state-specific disposable income once aggregate income and consumption fluctuations are controlled for, as proposed by Ostergaard et al. (2002).

Acknowledgements

I wish to thank the editor of this journal, Mark Taylor, for his insightful comments and suggestions. Financial support from the Hong Kong Polytechnic University (Research Grant No. G-T680) is gratefully acknowledged.

Notes

¹ Using annual Chinese national income and consumption data from 1961 to 1998, Zhang and Wan (2004) investigated the changing roles played by liquidity constraint and uncertainty in accounting for the dynamism of Chinese household consumption behaviour. Their results suggest that there is an increase in the proportion of liquidity-constrained consumers and increased uncertainty in the post-reform period.

² On 14 March 1997, the original Chongqing City in Sichuan province was promoted to the status of municipality. Chongqing province's data was merged, using population weights, to Sichuan province for data consistency.

³ We follow the notations at OSY: y_it  = Y_it  − Y_t refers to province i’s period t idiosyncratic (province-specific) real disposable income per capita where Y_it is province i’s period t per capita real income and Y_t is period t aggregate (China-wide) real disposable income (similarily for the consumption series).