Financial Repression and Household Consumption in Urban China
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| Title | Financial Repression and Household Consumption in Urban China
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| Author | Li Tao and Chen Binkai |
| Organization | School of Economics, Central University of Finance and Economics |
| Email | econlitao@gmail.com；chenbinkai@gmail.com |
| Key Words | Financial Repression; Household Consumption; Substitution Effect; Wealth Effect |
| Abstract | This paper studies the relationship between financial repression and household consumption. The theoretical model shows that financial repression will lead to lower consumption growth rate and lower expected consumption level, while the impact of financial repression on current consumption depends on the relative magnitude of wealth effect and substitution effect. Empirical studies based on household data reveal that, consumption growth rate will fall by 0.278 percentage points when the real interest rate is repressed by 1 percentage point. These empirical results are robust to measurement and omitted variables. We show that the wealth effect of financial repression is greater than the substitution effect. Financial repression lead to a decline in household disposable income, which reduces current and expected household consumption, while rises household saving rate. The policy implication of this paper is that removing entry barriers in the financial market and deregulating interest rate are crucial to improve income distribution and stimulate household consumption in China. |
| Serial Number | WP394 |
| Time | 2012-12-07 |
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