According to Friedman s (1957) permanent

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1 Can Rising Housing Prices Explain China s High Household Saving Rae? Xin Wang and i Wen China s average household saving rae is one of he highes in he world. One popular view aribues he high saving rae o fas-rising housing prices and oher living coss in China. his aricle uses simple economic logic o show ha rising housing prices and living coss per se canno explain China s persisenly high household saving rae. Alhough borrowing consrains and demographic changes can help ranslae housing prices o he aggregae saving rae, quaniaive simulaions using Chinese daa on household income, housing prices, and demographics indicae ha rising morgage coss conribue a mos 5 percenage poins o he Chinese aggregae household saving rae, given he down paymen srucure of China s morgage markes. (JEL D4, D9, E2, I3, R2) Federal Reserve Bank of S. Louis Review, arch/april 2, 93(2), pp According o Friedman s (957) permanen income hypohesis, raional consumers should save less when heir income is growing fas because he need o save is reduced when people expec o be richer in he fuure han hey are oday. However, he realiy in China is he opposie: China, as one of he fases-growing economies, has an average household saving rae among he highes in he world. Aggregae household saving rae is defined in his paper as he raio of ne changes in aggregae household financial wealh (e.g., bank deposis, governmen bonds, and socks) o aggregae household disposable income. Figure shows ha he average Chinese household saving rae was around 2 percen in 978 (he firs year of economic reform) and rose rapidly hereafer. he saving rae sabilized a around 2 o 25 per- Noice ha our definiion of he saving rae does no include changes in household nonfinancial wealh (such as housing invesmen). cen afer he early 99s and peaked in 994 and 23 wih values of 27 percen and 26 percen, respecively. Such a persisenly high aggregae household saving rae is exraordinary compared wih developed naions such as he Unied Saes, which has had an average household saving rae of 2 percen since he early 99s. However, he high Chinese saving rae is no unique. Figure 2 shows he household saving raes for Japan and Korea in he poswar period. Boh economies had a high household saving rae above 2 percen during heir rapid economic growh periods (Japan in he mid-97s and Korea from 987 o 994). 2 2 hese daa are based on he Organisaion for Economic Co-operaion and Developmen daabase, Hayashi (986), and Bai and Qian (29). We are unable o find reliable household saving daa for India. However, according o a repor from he Cenre for onior - ing Indian Economy, India s household saving rae (including invesmen in fixed asses) in 2 was 24 percen. his number rose o 35 percen in 27 and 36 percen in 28. Based on such informaion, India s household saving rae has reached a level similar o China s. Xin Wang is a docoral suden in he School of Economics and anagemen a singhua Universiy in Beijing, China. i Wen is an assisan vice presiden and economis a he Federal Reserve Bank of S. Louis and professor of economics a singhua Universiy. he auhors hank Carlos Garriga, David Wheelock, ichael Z. Song, Weilong Zhang, and seminar paricipans a singhua Universiy and People s Universiy for helpful commens and Zhengjie Qian for sharing daa. 2, he Federal Reserve Bank of S. Louis. he views expressed in his aricle are hose of he auhor(s) and do no necessarily reflec he views of he Federal Reserve Sysem, he Board of Governors, or he regional Federal Reserve Banks. Aricles may be reprined, reproduced, published, disribued, displayed, and ransmied in heir enirey if copyrigh noice, auhor name(s), and full ciaion are included. Absracs, synopses, and oher derivaive works may be made only wih prior wrien permission of he Federal Reserve Bank of S. Louis. FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 6 7

2 Figure Chinese Household Saving Rae (978-26) Household Saving Rae (percen) SOURCE: Bai and Qian (29). Figure Cross-Counry Comparison of Household Saving Raes (968-27) 26 Household Saving Rae (percen) China Japan Souh Korea ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

3 Why he Japanese saved so much during he rapid sage of economic developmen is sill an open quesion (see, e.g., Hayashi, 986). Hence, i is no surprising ha he high Chinese saving rae appears puzzling, especially given China s rapid income growh. he high saving rae of Chinese households no only poses a challenge o economic heory, bu also has become a source of recen poliical conroversy and rade dispues wih he Unied Saes and is oher major rading parners. For example, he former Chairman of he Federal Reserve, Alan Greenspan, alleged ha he high Chinese saving rae was likely he culpri of he recen American subprime morgage crisis because i caused low ineres raes in he world financial markes, which pushed Americans oward excessive consumpion and housing finance (Greenspan, 29). Curren Chairman Ben Bernanke (25) also argued ha he global saving glu is parly responsible for he increase in he U.S. curren accoun defici. Wha are he causes of he high Chinese saving rae? A growing segmen of he macro lieraure has focused on undersanding his phenomenon. any facors have been proposed as possible causes, including rapid income growh, aging populaion, lack of social safey nes and unemploymen insurance, precauionary saving moives, culural radiion of hrif, high coss of educaion and healh care, and rising housing prices, among ohers. 3 In paricular, Wei and Zhang (29) propose ha he unbalanced sex raio in China leads o compeiive saving behavior in he marriage markes, which may significanly raise he aggregae household saving rae because men wih adequae wealh accumulaion (e.g., enough savings o buy houses) are more likely o arac marriage parners. Such compeiive behavior furher drives up housing prices and reinforces his compeiive saving behavior. Chamon and Prasad (2) argue ha he rapidly rising privae burdens of housing, educaion, and 3 his lieraure includes odigliani and Cao (24); Overland and Weil (2); Horioka (99); Horioka and Wan (27); Chen, Imrohoroglu, and Imrohoroglu (26); Song, Soresleen, and Ziliboi (2); uan and Song (999, 2); and Wen (29), among ohers. healh care are he mos imporan conribuing facors. hey also conjecure ha he impac of hese facors on saving can be amplified by underdeveloped financial and credi markes. Indeed, he rapidly rising housing prices and oher living coss in China are serious socioeconomic problems and have araced much aenion from he news media and policymakers. In Beijing and Shanghai, for example, he average housing price-o-income raio (for a 27.-squaremeer [3-square-foo] living space) is abou 2. 4 Specifically, a young married couple needs o save heir enire income (a percen saving rae) for 2 years o afford a square-meer (6- square-foo) aparmen. 5 Hence, i is no surprising ha rising housing prices have been perceived as one of he mos imporan facors underlying China s high aggregae household saving rae. Bu can rising housing prices really explain he persisenly high household saving rae in China? his is no only an empirical quesion, bu also a heoreical one wih broad implicaions for developing economies. o he bes of our knowledge, lile heoreical work has been done o carefully and quaniaively address his quesion. Based on simple economic logic and quaniaive analysis, our answer o his quesion is basically No. ore specifically, we show he following: In he absence of economic growh and borrowing consrains, he aggregae household saving rae of an economy is independen of housing prices. Only under he following combined condiions will high housing prices significanly increase he aggregae household saving 4 According o China Saisical earbook (27), in 26 he average living space per person was 27. square meers (29.7 square fee) in urban areas and 3.7 square meers (323.9 square fee) in rural areas. However, he average living space for new homebuyers is greaer han 3 square meers (322.9 square fee). 5 According o China Saisical earbook (28), in 27 he naionwide average housing price was 3,645 yuan per square meer,,66 yuan for Beijing, and 8,253 yuan for Shanghai. In 27, he average disposable income per capia was 3,786 yuan naionwide, 2,989 yuan in Beijing, and 23,623 yuan in Shanghai. Hence, if he living space per person is 3 square meers (322.9 square fee), he raio of housing price o disposable income would be 7.93 for he naion, 4.55 for Beijing, and.48 for Shanghai. FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 6 9

4 rae: (i) Agens have severe borrowing consrains wih zero possibiliy of obaining morgage loans, (ii) over ime, he populaion of poenial fuure homebuyers increases rapidly relaive o curren homebuyers, and (iii) housing prices rise faser han household income. However, hese condiions are inconsisen wih Chinese realiy. Quaniaive simulaions based on Chinese ime-series daa for household income, housing prices, demographic srucure, and morgage down paymen requiremens show ha rising housing prices can conribue a mos 5 percenage poins o he aggregae saving rae. he inuiion is simple: Suppose he only reason o save is o buy a house. Regardless of he level of housing prices, income saved for fuure housing purchases by fuure homebuyers (called would-be homebuyers in his paper) is always canceled by housing expendiures of he curren homebuyers in he measured aggregae saving raio. In oher words, as soon as a person spends his or her pas savings o purchase a good, he average lifeime saving rae for ha individual immediaely becomes zero. If par of he expendiure is financed by bank loans agains he buyer s fuure income, he average lifeime saving rae a he momen of he home purchase is negaive because he buyer mus coninue o save in he fuure o repay he loans unil he deb is compleely repaid. Hence, if he populaion is no growing and housing prices are consan, he aggregae saving rae across all cohors a any poin in ime is independen of housing prices, regardless of borrowing consrains. On he oher hand, if housing prices are rapidly growing, hen he populaion share of fuure homebuyers is effecively increasing relaive o ha of curren homebuyers. In his case, he expendiures of he curren homebuyers canno compleely cancel he savings of he would-be homebuyers. Because young cohors need o save more and for longer periods under borrowing consrains when housing prices increase, his is equivalen o a coninuous expansion of he populaion size of he saving cohor relaive o he dissaving cohor. In oher words, boh housingprice growh and borrowing consrains are equivalen o populaion growh in erms of heir impac on he aggregae saving rae. We call such equivalence he populaion effec. Under such populaion effec, housing prices may play an imporan role in deermining he aggregae saving rae. However, if household income increases a roughly he same rae as housing prices (as is he case in China), hen he anicipaed rising permanen income would reduce he need o save and cancels he populaion effec. In fac, he rapid growh in household income is he key force driving he rapidly rising housing prices in China, given he scarciy of habiable land in China. herefore, our analysis clarifies a popular confusion or misundersanding ha aribues he high aggregae household saving rae in China o rising housing prices and oher coss of living. he same logic can also be applied o discredi similar heories ha view he rising privae burden in educaion, childbearing, healh care, marriage, and so on in China as he major facors conribuing o China s high aggregae household saving rae. Our analysis also reveals a poenial ension or conflic beween survey daa and economic analysis. Suppose survey daa unambiguously indicae ha cos-of-living facors are he primary moive for each household o increase is saving rae. Such empirical facs by no means imply ha rising living coss are responsible for he persis - enly high aggregae household saving rae because incomes saved for any spending needs will always be consumed a laer sages of life. Hence, such ypes of savings will cancel across households among differen cohors. Even if savings are no enirely spen wihin a person s lifeime and become bequess, hey would reduce he children s need o save by exacly he same amoun. hus, any such ype of savings should be canceled hrough aggregaion across age cohors. Hayashi (986) analyzes he possible causes of Japan s high household saving rae in he 96s and 97s. His analysis includes discussions regarding he possible impac of rising housing prices on he saving behavior of Japanese house- 7 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

5 holds. In paricular, using regression analysis, he finds ha he average household saving rae of a given Japanese ciy is independen of ha ciy s average housing prices. 6 Based on his finding, Hayashi concludes ha rising housing prices per se are no he cause of Japan s high household saving rae because of he saving-expendiure cancellaion effecs across populaion and age cohors. his conclusion is similar o ours. How - ever, Hayashi did no conduc deailed heoreical analysis o rigorously prove he poin, so his analysis is no generalizable and may no apply o China. In paricular, he did no consider he possibiliy ha under severe borrowing consrains, rising housing prices may significanly increase he aggregae household saving rae. In his paper, we choose a simple consumpionsaving model o illusrae our poins, ye wihou he loss of generaliy. In he model, many variables (such as household income, housing prices, opimal age of homebuyers, and demographic srucure) are deliberaely kep exogenous so ha comparaive saisics can be easily obained using Chinese daa. he only endogenous opimizaion behavior derived from he model is consumpion smoohing over a person s lifeime subjec o borrowing consrains. his framework provides he simples seup o calibrae he model using various Chinese ime-series daa. he remainder of he paper is organized as follows. he nex secion presens a benchmark consumpion-saving model wihou borrowing consrains and sudies he effecs of housing prices on he aggregae household saving rae. In subsequen secions we exend he analysis o include borrowing consrains, conduc robusness analysis, and consider oher exensions of he basic model. he final secion summarizes our findings and includes some policy recommendaions. HE BASIC ODEL Consan Income and Housing Prices Suppose sheler (housing) is an indivisible and necessary consumpion good ha depreciaes compleely a he end of a homeowner s life. Given household income, increases in housing prices will force individual consumers o save more (and for a longer period) o afford a house. his posiive associaion beween housing prices and individual saving behavior may be why people view rising housing prices as a cause of he high aggregae saving rae in China. However, his view suffers from he fallacy of aggregaion: I ignores he fac ha when people purchase houses, hey generae negaive savings o sociey, canceling oher people s posiive savings. ore specifically, suppose ha (i) he ineres rae is zero and here is no discouning in he fuure, 7 (ii) each individual s only purpose for saving a a young age is o buy a house in middle age, and (iii) here are no debs or bequess a birh or afer deah. Clearly, in such a sociey, each person s average lifeime saving rae should be exacly zero. Alhough a higher housing price will increase an individual s saving rae before purchasing a house, i does no change he average lifeime saving rae because a he momen of home purchase, all of he buyer s posiive savings are exacly canceled by he curren expendiure. herefore, if he populaion is sable over ime (i.e., each age cohor has he same number of individuals), hen he aggregae saving rae is also zero, independen of housing prices. Formally, imagine an economy where all agens have he same momenary uiliy funcion, and a ypical consumer lives for periods wih a consan income flow in each period. Each consumer needs o buy a house in period +, 8 he price of a house is >, and here are no borrowing consrains excep he zero deb 6 Hayashi also esimaed he saving raes of homeowners, would-be homebuyers, and non-homeowners who do no plan o own houses in rural and urban areas. He argued ha if housing prices have a significan impac on a household s saving rae, hen he saving rae of would-be homebuyers should be significanly higher han he oher wo ypes of households, and urban households should have a higher saving rae han rural households. However, he did no find such differences in he Japanese daa. 7 Our resuls are robus o hese assumpions. 8 Because can ake arbirary values, we can calibrae i using Chinese daa. aking i endogenous complicaes he analysis dramaically wihou addiional gains. An addiional advanage of keeping exogenous is ha we need no worry abou how and when housing eners he uiliy funcion. ha is, we can ignore he uiliy value of housing wihou loss of generaliy. FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 7

6 able Saving Behavior of Individual Consumers Period: + +2 Expendiure / / / + / / Savings / / / / Saving rae requiremen and he assumpion of percen depreciaion of a house a he end of a homeowner s life. Naurally, we also need o assume > o ensure ha each consumer is able o afford a house wih his or her lifeime income. Under hese condiions, because of he zero ineres rae and no discouning, he marginal uiliy of consumpion (C) is exacly he same across ime, so uiliy maximizaion implies ha he consumer will save a consan amoun of his or her personal income flow each period o smooh consumpion. Formally, he maximizaion problem is saed as follows: max: = s..: C +. = u C Noice ha we have deliberaely omied housing consumpion in he uiliy funcion o simplify he analysis. his is an innocuous assumpion because sheler is a necessary consumpion good and he wealh effec generaed from a house, if i exiss, will only decrease he incenive for saving raher han increase i. he opimal soluion o he above problem is C =. ha is, consumpion is perfecly smoohed and equals a consan. However, noice ha he oal expendiure in period + equals consumpion plus he housing expendiure: C + +. his ypical consumer s expendiure, savings, and saving rae in each period of his or her lifeime are repored in able. he firs line of able indicaes he consumer s living period (or age), he second line oal expendiures in each period, he hird line addiional savings in each period, and he las line he saving rae in each period, which is defined as he raio of addiional savings o income. Noice ha he consumer s saving rae is always in each period excep in period +. In period +, because of he addiional expendiure of he housing purchase, he saving rae is negaive, <. he consumer s average lifeime saving rae is () Lifeime average saving rae = =. = Because he negaive savings incurred a he momen of a home purchase exacly cancel he posiive savings in he oher periods, housing prices are irrelevan o he consumer s lifeime saving rae. o compue he aggregae household saving rae in his economy wih many differen age cohors for a paricular period, we need o aggregae he saving rae of each age cohor in ha period. here exis wo measures (or definiions) of he aggregae saving rae: 7 2 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

7 (i) he average of he personal saving rae across cohors weighed by he populaion share of each age cohor namely, (2) where α represens he populaion share of cohor in he oal populaion, and represens he saving rae of cohor. (ii) he raio of aggregae saving o aggregae income in he same period: (3) S = α s, s S = S = = = = αs, α where α sill denoes he populaion share of cohor, S denoes he savings of cohor, and he income of cohor. We can call definiion (i) he average household saving rae and definiion (ii) he aggregae household saving rae. Clearly, if all cohors have he same income levels and idenical populaion shares, he wo definiions are equivalen. How - ever, if differen cohors have differen income levels and populaion shares (e.g., because of income growh and populaion growh), he wo measures of he aggregae saving rae are no idenical. Because definiion (ii) depends only on macro daa and is consisen wih he daa presened in Figures and 2, we adop definiion (ii) in equaion (3) as he measure of he aggregae household saving rae for he remainder of his paper. Assume for a momen idenical populaion shares across cohors (we relax his assumpion in he nex secion); hen α = in equaion (3). In his case, because income and housing prices are ime invarian, we can compue he aggregae household saving rae in equaion (3) using informaion provided in able o obain (4) S = S = = ψ = = = =, namely, he aggregae saving rae is zero and independen of housing prices. Hence, under he mainained assumpions of consan income and demographics, changes in he level of housing prices do no affec he aggregae saving rae, alhough hey do affec individuals saving raes. In oher words, even if 99 percen of he oal populaion is saving for fuure home purchases, he oher percen (homebuyers) can generae jus enough negaive savings o cancel he would-be homebuyers posiive savings, resuling in a zero aggregae saving rae. his logic of aggregaion is simple bu no always recognized. However, does he conclusion coninue o hold if income and housing prices grow over ime? In a sense, coninuously rising housing prices imply ha young cohors mus coninuously increase heir saving rae and save for a longer period o afford a house. Consequenly, he relaive populaion share of would-be homebuyers will become larger han ha of curren homebuyers (even wihou populaion growh), and his populaion effec may resul in a posiive aggregae saving rae, holding income consan. On he oher hand, if income is also growing over ime, he effecive share of would-be homebuyers relaive o homebuyers will shrink because he need o save is reduced (a negaive populaion effec), everyhing else equal. herefore, if income and housing prices are growing a he same ime, heir populaion effecs may (a leas parially) cancel each oher, leading o insignifican changes in he aggregae saving rae. his issue is he focus of he nex subsecion. ime-varying Income and Housing Prices In a model wih ime-varying income and housing prices, a consumer born in period who needs o purchase a house in period + solves he following problem: FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 7 3

8 able 2 Saving Behavior of Differen Age Cohors Age cohors: + +2 Permanen income ++ Housing price ++ Savings / / / ++ / Saving rae he opimal soluion is given by where denoes a consumer s permanen income (i.e., average lifeime income). oal expendiure in period + is C + +. Suppose he opimal age for each consumer o become a homeowner is + periods afer birh. Suppose a he presen momen his cohor of homebuyers faces housing price and has permanen income. We call his age group cohor + or homebuyer cohor. Based on such noaions, he generaion one period younger han cohor + is called cohor, who will become homebuyers in he nex period and face housing price and permanen income. Analogously, he generaion one period older han he homebuyer cohor is called cohor +2, who have already bough a house one period ago when he housing price was and permanen income was. Similarly, a he presen momen all genmax: = u C s..: C +. + = = C = +, = = eraions younger han he homebuyer cohor are called cohors {,2,,}; hese consumers will face housing prices {,,, } and permanen income {,,, }, respecively, when hey purchase homes in he fuure. Also, a he momen all generaions older han he homebuyers are called cohors {+2,+3,,}; and each person in hese cohors bough a house wih price {, 2,, + } and permanen income {, 2,, + }, respecively, in he pas. Based on he above noaions, we can abulae he incomes, savings, and saving raes of differen age cohors a he presen momen. he firs line in able 2 shows he age of differen cohors a he presen momen, he second line heir respecive permanen income levels, he hird line he housing prices hey face when becoming a homeowner, he fourh line heir curren level of savings, and he las line heir respecive saving rae a he presen momen. he able shows ha a he same ime poin differen age cohors have differen saving raes because permanen income and housing prices are changing over ime. How ever, regardless of age, he saving rae of each cohor is a funcion of he housing price-o-income raio / facing ha paricular cohor. herefore, if he housing price-o-income raio remains consan over ime despie growing housing prices and permanen income, hen differen age cohors (excep he homebuyer cohor) have he same saving rae, whereas he home- 7 4 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

9 buyer cohor always has a negaive saving rae ha offses he posiive savings of he oher cohors. Hence, he average saving rae across cohors is exacly zero because each cohor is weighed idenically by he facor / in compuing he socieal average saving rae. However, because by definiion he aggregae saving rae is he raio of aggregae saving o aggregae income, insead of he weighed sum of individuals saving raes, he measured aggregae saving rae is no necessarily zero bu depends on he curren housing price-o-aggregae income raio. ha is, he negaive savings of he homebuyer cohor (cohor +) may receive a lower (or higher) weigh han / if equaion (3) is used as our measure of he aggregae saving rae. For example, if he raio of cohor + s housing price ( ) o aggregae income equals /, hen he measured aggregae saving rae is sill zero. How - ever, if ha raio is greaer han /, hen he measured aggregae saving rae is less han zero because he negaive savings caused by he homebuyer cohor more han offses he oal savings from oher cohors due o ime-varying housing prices and income; if ha raio is less han /, he measured aggregae saving rae is posiive. o sor hese effecs, consider firs he case in which permanen income and housing prices have consan growh raes according o he equaions = + a and = + b, respecively, where he growh raes a and b are boh consans. Noice ha if annual income grows a a consan rae, hen he permanen income also grows a he same consan rae. Under hese condiions, he aggregae saving rae is given by (5) S = + + S = = = + + = + + = b ( + a) If a and b, equaion (5) can be simplified o S = ( + ) b b ( + b), ( + a) + + ( + a ) + a. which depends only on he housing price-oincome raio of he curren homebuyer cohor. For example, suppose a = b = percen, = 4, and = 5. 9 hen equaion (5) gives an aggregae saving rae of 2.4 percen, which is rivial compared wih he 2 percen Chinese aggregae saving rae. On he oher hand, i is possible o obain an aggregae saving rae of 2 percen in he model if we allow he growh rae of permanen income and housing prices o be 5 percen per year, which is hard o imagine in realiy. herefore, when housing prices and permanen income grow a he same rae wihin an empirically plausible range, housing prices are sill largely irrelevan o he aggregae saving rae. Calibraion. We now use acual Chinese daa o calibrae he model. Suppose ha people sar working a age 2 and reire a age 6; hus, we se he oal working years = 4. Also suppose ha he average homebuyer s age is 35 ha is, people mus work and save for 5 years before buying a house. his implies ha = 5 in our model (e.g., in able 2). Suppose ha individuals in he homebuyer cohor (cohor +) become homeowners in he year 27; in ha year he housing price-o-income raio in China was 7.93, so we se / = 8. According o he Chinese Saisical earbook (28), from 978 o 27 he growh rae of average family income was 2.57 percen in rural areas and 3.58 percen in urban areas; hence we se a =.3. According o he China acroeconomic Infor ma ion Nework Daabase, he average growh rae of housing prices was 9.2 percen per year beween 99 and 28; hence we se b =.9. Enering hese numbers ino equaion (5), he esimaed aggregae saving rae equals percen: ha is, rising housing prices explain only percenage poin of China s aggregae household saving rae, subsanially below he acual 27 percen saving rae in 27. oreover, even if he growh rae of housing prices exceeds ha of income, he impac of rising housing prices on he aggregae saving rae is sill quie limied. For example, when he growh 9 = 4 and = 5 imply ha each individual needs o work for 5 years o afford a house and work for 4 years o reire (income is assumed o be zero afer reiremen). FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 7 5

10 rae of household income is percen per year, he average growh rae of housing prices mus be almos 2 percen per year o reach an aggregae saving rae of 2 percen in he model. Alhough a 2 percen annual growh rae in housing prices is possible for a shor period, we have no seen such a high average growh rae over a -year period in China or anywhere else in he world. Calibraion 2. he above calibraion analysis is based on he assumpion ha he growh raes of income and housing prices are consan over ime. If we allow he growh rae of income and housing prices o vary over ime, how does his affec our resuls? Because he simple model is no longer analyically racable under uncerainy, we assume perfec foresigh o gain inuiion. When he growh raes of boh income and housing prices are ime varying, able 2 implies ha he aggregae household saving rae is deermined by (6) S = + + = = + + As before, using 27 as he base year for curren homebuyers (cohor +), = P 27, where P 27 denoes he average housing price in 27. Recall ha we use a 4-year window o compue he permanen income based on 4 years of average household income beween year 27 and year 27 +, where = 4. For example, he permanen income of cohor + is denoed by = 27 + j j = 27. Using he same mehod, we can also esimae he permanen incomes of cohors {,2,,} and cohors {+2,+3,,}. By enering he esimaed values of housing prices facing homebuyers of differen age cohors, {,,,,, + }, and he corresponding permanen incomes, Compuing young cohors permanen income requires he use of income daa afer 29. Since such daa do no exis, we exrapolae by assuming a percen annual growh rae afer 29. We provide he sensiiviy analyses in a laer secion.. {,,,,, + }, ino equaion (6), we obain an aggregae saving rae of.6 percen. herefore, regardless of how he model is calibraed, we conclude ha in he absence of borrowing consrains, rising housing prices alone canno explain China s aggregae household saving rae. BORROWING CONSRAINS AND DEOGRAPHICS Our basic model makes wo imporan assumpions: (i) Consumers can compleely smooh heir consumpion over a working lifeime by using fuure income o finance curren morgage paymens. (ii) he populaion or demographic srucure does no change over ime. hese assumpions are no realisic and may bias our resuls. Assumpion (i) would be innocuous if household income, housing prices, and populaion were consan over ime. o undersand his poin, suppose consumers canno borrow a all. hen cohor + mus increase is saving rae a a younger age o accumulae jus enough money o pay off he enire morgage before period +. In his case, if income and housing prices do no grow over ime, he aggregae saving rae is sill zero because he negaive savings generaed by cohor + in he housing marke sill compleely cancel he oal posiive savings from cohors {,2,,}. However, if income and housing prices grow over ime, assumpion (i) is no longer innocuous and borrowing consrains may grealy magnify he posiive impac of housing prices on he aggregae saving rae. he assumpion of a consan populaion size does no allow our model o capure any ransiional dynamics ouside he seady sae. Hence, he demographic srucure is also imporan for he robusness of our analysis and conclusions and should be considered. Formal analyses wih assumpions (i) and (ii) relaxed are presened below. We consider firs he case wih borrowing consrains and hen he case wih a ime-varying populaion srucure. 7 6 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

11 able 3 Saving Behavior of Individuals under Borrowing Consrains* Period: + +2 Expendiure / / + Savings / / Saving rae NOE: *Consan income and housing prices. able 4 Saving Behavior of Differen Age Cohors under Borrowing Consrains* Age cohors: + +2 Permanen income ++ Housing price ++ Savings / / Saving rae NOE: *ime-varying income and housing prices. Borrowing Consrains o faciliae fuure analysis, we firs consider consan income and housing prices under borrowing consrains. If agens canno borrow a all and he opimal iming for purchasing a home is sill + periods afer birh (we examine he robusness of he resuls o his assumpion laer), he would-be homebuyers mus hen increase heir saving raes before period +. his implies ha from period o he saving rae is /, and opimal consumpion is /. Beween period +2 and period, he opimal consumpion level is and he saving rae is zero. In period +, oal expendiure (consumpion plus housing purchase) is +. hese saisics are summarized in able 3. Compared wih able, he addiion of borrowing consrains raises he individual s saving rae from / o /; however, he average lifeime saving rae is sill zero. Hence, if he populaion share of each age cohor is he same, he aggregae saving rae is also zero. Now wih ime-varying income and housing prices, he effecive share of each cohor is no longer he same because of he populaion effec. In his case, we can use a mehod similar o ha used for able 2 o compue each age cohor s saving rae under borrowing consrains. hese resuls are summarized in able 4. FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 7 7

12 Each generaion purchases houses + periods afer birh. A a paricular momen, he curren homebuyer generaion is called cohor +, and his cohor faces housing price and permanen income. he one-period-younger generaion is cohor ; his cohor will be buying houses in he nex period, facing housing price and permanen income, and his generaion s curren saving rae is /. Analogously, he one-period-older generaion is cohor +2; hese individuals have already bough houses in he las period, faced housing price and permanen income, and heir curren saving rae is, in conras o he model in able 2. All cohors proceed in a similar fashion. Suppose permanen income and housing prices grow over ime according o he equaions = + a and = + b, respecively, where he growh raes a and b are boh consan. Under such condiions, he aggregae saving rae is given by (7) S = = = + + which can be simplified o S = + b, ( + a) ( + b) ( + b) ( + b) ( + a) + + ( + a) ( + a) I can be shown ha he aggregae saving rae wih borrowing consrains is larger han ha wihou borrowing consrains. he inuiion is as follows. Wihou borrowing consrains, when housing prices increase, he average saving rae of would-be homebuyers is larger han ha of he curren homeowners because of he populaion effec. Wih borrowing consrains, his populaion effec is significanly magnified because he saving rae of all homeowners is now zero. In oher words, in compuing he aggregae savings, he populaion weigh of would-be homebuyers is increased from / o /, while he populaion. weigh of he curren homeowners is decreased from / o. Because he aggregae income of all cohors is he same, he raio of aggregae savings o aggregae income (he aggregae saving rae) has increased under borrowing consrains. Calibraion. As in he previous analysis (wih ime-varying income and housing prices), we se = 4, = 5, / = 8, a =.3, and b =.9. Subsiuing hese values ino equaion (7) gives an aggregae saving rae of 6.66 percen. Alerna - ively, if we allow he growh rae of income and housing prices o vary over ime (as in acual Chinese daa), under he assumpion of perfec foresigh, he aggregae saving rae is given by (8) S = = = + +. Using he same mehod adoped in a previous secion, namely, choosing 27 as he base year for he curren homebuyers (cohor +), esimaing and compuing he associaed values for housing prices {,,,,, + } and permanen incomes {,,,,, + }, and subsiuing he resuls ino equaion (8) gives an aggregae saving rae of 9.22 percen, higher han ha implied by equaion (7). Clearly, under severe borrowing consrains (i.e., no borrowing a all), using acual Chinese ime-series daa for housing prices and income implies esimaes of he aggregae saving rae ha mach he acual Chinese household saving rae quie well. I hus appears ha rising housing prices can explain China s high household saving rae if borrowing consrains are aken ino accoun. Bu is his really he case? No really. In realiy, he degrees of borrowing consrains are no as severe as assumed in he previous analysis. ypically, homebuyers need o pay only one-hird of he housing price as a down paymen and can borrow a leas wo-hirds wih he morgage. Bu how would a slighly relaxed borrowing consrain affec our quaniaive resul? o be conservaive, we assume ha he down paymen requiremen is as high as 5 percen of 7 8 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

13 able 5 Saving Behavior of Individuals wih 5 Percen Down Paymen* Period: + +2 Expendiure / / + Savings /2 /2 2 2 Saving rae NOE: *Consan income and housing prices. 2 2 he house price. In his case, he borrowing consrains do no bind if each generaion s opimal ime for buying a house is afer working for 2 years (because of sufficien savings). However, as long as each generaion sill needs o purchase houses afer working for only 5 years (as assumed previously), borrowing consrains will sill bind for every generaion wih an empirically plausible growh rae of income and housing prices. A ypical individual s saving behavior given hese condiions is shown in able 5. Beween period and period of an individual s lifeime, a consumer s annual saving is /2 (see able 5); in period +, he oal pas savings are jus enough o pay for he 5 percen down paymen, so he consumer needs o borrow he oher 5 percen from fuure income o pay for he morgage. hus, in period + he buyer s housing expendiure is and saving is 2( ) ; aferward, fuure saving for each period is always 2. In China, he down paymen required for home loans has been abou one-hird of he purchase price unil recenly. Now he down paymen for he firs house is one-hird and ha for he second house is one-half of he purchase price (some people in China own more han one home for invesmen purposes). Based on such informaion and assuming ime-varying income and housing prices, we can use he mehods oulined in he previous secions o compue each cohor s saving rae a he same poin of ime (able 6). As shown, if permanen income and housing prices follow a consan growh rule, = + a and = + b, hen he aggregae saving rae is given by (9) In such a case, we use Chinese daa o se = 4, = 5, / = 8, a =.3, and b =.9. Subsi - uing hese values ino equaion (9) gives an aggregae saving rae of 4.7 percen. On he oher hand, if he growh raes of income and housing prices are ime varying, he aggregae saving rae is given by () S = S = + b 2 + = = + + = = = + + = + + ( + b) 2( ) ( + a) Using he same mehod as before, by seing 27 as he base year for homebuyers (cohor +) and compuing he associaed housing prices {,,,,, + } and permanen incomes.. FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 7 9

14 able 6 Saving Behavior of Differen Age Cohors wih 5 Percen Down Paymen* Age cohors: + +2 Permanen income ++ Housing price ++ Savings /2 /2 2 2 Saving rae NOE: *ime-varying income and housing prices {,,,,, + }, equaion () implies an aggregae saving rae of 4.34 percen. We can make he following conclusions from he above analyses: Borrowing consrains can significanly amplify he posiive effecs of housing prices on he aggregae saving rae. However, as long as he borrowing consrains are no oo severe (i.e., wih a 5 percen down paymen), 2 he effecs of rising housing prices on he aggregae saving rae are quie moderae, less han 5 percenage poins. Our analysis also indicaes ha, relaive o rising housing prices and oher living coss, borrowing consrains may play a more imporan role in explaining China s high household saving rae. his also explains why more han a decade of rising U.S. housing prices before he recen financial crisis did no induce a high household saving rae: American families are much less borrowing consrained han Chinese households. Our conclusion is consisen wih he analysis of Wen (29), who shows in a general equilibrium growh model ha borrowing consrains no only induce a high precauionary saving rae under income uncerainy, bu also make his precauionary saving rae an increasing funcion of income growh. hus, a high income growh rae 2 he acual down paymen requiremen in China is less han 5 percen. Assuming a smaller value furher reduces he impac of housing prices on he aggregae saving rae. can lead o a high aggregae saving rae under borrowing consrains and income uncerainy. Demographics As wih income and housing price changes, a changing populaion should have no impac on he aggregae saving rae wihou borrowing consrains. hus, his secion considers only cases wih borrowing consrains. If he populaion changes over ime, he populaion weighs α in equaion (3) for differen cohors mus be adjused accordingly when compuing he aggregae saving rae. hus, if W denoes cohor s share in oal populaion and assuming ha permanen income and housing prices follow he equaions = + a and = + b, hen he aggregae saving rae based on equaion (3) is given by () S = = W = + + ( + b ) W W ( + a) which is analogous o equaion (7). Based on he populaion shares of individuals 2 o 6 years of age provided in China Populaion and Employmen Saisics earbook (28), assuming ha working ages are from 2 o 6, he average homebuyer s age is 35 (i.e., he, 8 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

15 Figure 3 Populaion Shares of Differen Age Cohors in 27 Populaion Share (percen) Age SOURCE: China Saisical earbook. or she mus work for 5 years o buy a house); using he average income growh and housing price growh in China, equaion () implies an aggregae saving rae of.47 percen, lower han he value wih consan populaion. If we allow a 5 percen down paymen for he morgage, he implied aggregae saving rae is negaive (.75 percen), also lower han he value wih consan populaion. If we allow he growh raes of income and housing prices o vary over ime, under percen borrowing consrains ( percen down paymen), he aggregae saving rae is given by (2) S = = W = + + W W Using a similar calibraion mehod as in he previous secion by choosing 27 as he base year for he homebuyer cohor, he implied aggregae. saving rae is.32 percen, lower han he value wih consan populaion. If we allow a 5 percen down paymen, he implied aggregae saving rae is.62 percen, also lower han he value wih consan populaion. he reason ha aking he demographic srucure ino accoun yields a lower aggregae saving rae, everyhing else equal, is ha in recen years he homebuyer cohor is a is peak in erms of is populaion share. herefore, he negaive savings generaed by his cohor receives larger weigh han oher cohors. Figure 3 plos he demographic srucure in China based on China Populaion and Employmen Saisics earbook (28), given he assumpion ha working ages are beween 2 and 6 and he average homebuyer s age is 35. he homebuyer cohor peaked around 27. If he base year of he homebuyer cohor is moved o oher years, such as 25 or earlier, or if we change he assumed age of homebuyers, he implied aggregae saving rae will differ only FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 8

16 able 7 Aggregae Saving Rae under Differen Assumpions Assumpions Equaion Saving rae (%) No BC, consan {D, I, P} (4). No BC, consan D, consan growh in {I, P} (5). No BC, consan D, ime-varying growh in {I,P} (6).6 % BC, consan D, consan growh in {I,P} (7) 6.66 % BC, consan D, ime-varying growh in {I,P} (8) % BC, consan D, consan growh in {I,P} (9) 4.7 5% BC, consan D, ime-varying growh in {I,P} () 4.34 ime-varying D, % BC, consan growh in {I,P} ().47 ime-varying D and growh in {I,P}, % BC (2).32 ime-varying D, 5% BC, consan growh in {I,P}.75 ime-varying D and growh in {I,P}, 5% BC.62 NOE: BC, borrowing consrains; D, populaion; I, income; P, housing price; % BC, full down paymen. insignificanly from he values obained above. he reason is simple: Unless he populaion has been sharply declining so ha he populaion share of he homebuyer cohor is always significanly larger han ha of he would-be homebuyer cohors (which is inconsisen wih Chinese daa), aking he demographic srucure ino accoun canno srenghen he effec of rising housing prices on he aggregae saving rae. Summary of Analyses he previous analyses covered hree scenarios: (i) ime-varying income and housing prices, (ii) borrowing consrains, and (iii) demographic changes. he resuls are briefly summarized in able 7. he firs column liss he assumpions, he second column shows he corresponding equaion used o compue he aggregae saving rae, and he las column shows he numerical value of he aggregae saving rae. he firs hree rows in able 7 show ha wihou borrowing consrains and demographic changes, rising housing prices conribue lile o he aggregae saving rae: less han percen. he subsequen wo rows show ha under complee borrowing consrains (wih zero possibiliy o borrow), rising housing prices can have large effecs on he aggregae saving rae, ranging from 6.66 o 9.22 percen. However, such effecs are quickly dampened once he degree of borrowing consrains is reduced. For example, wih a 5 percen down paymen requiremen, he aggregae saving rae is reduced o 4.7 percen and 4.34 percen, respecively, depending on he specific income process. In addiion, if China s demographic srucure is aken ino accoun, he las wo rows in he able show ha he saving rae is reduced furher: down o.75 percen and.62 percen, respecively. herefore, given Chinese ime-series daa on household income, morgage prices, borrowing coss, and demographics, we can conclude ha he aggregae household saving rae is essenially unrelaed o housing prices. ORE SENSIIVI ANALSES Differen Exrapolaions In he previous analyses, we exrapolaed he fuure growh raes of permanen income and housing prices beyond 29 when considering he effecs of ime-varying income and housing prices. For example, in equaion () we assumed fuure growh raes of income and housing prices 8 2 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

17 able 8 Sensiiviy Analysis for Differen Fuure Growh Raes* Expeced housing price growh (%) Expeced income growh (%) ime-varying populaion (%) NOE: *For individuals wih 5 percen down paymen. of percen per year afer 29. In he following, we conduc sensiiviy analyses on equaion () by considering oher possible growh raes for fuure income and housing prices. Le us assume a 5 percen down paymen requiremen and ha fuure growh raes of income and housing prices ake he values of 8 percen, 9 percen, percen, percen, and 2 percen, respecively. he implied aggregae saving raes under hese possible fuure growh raes for income and housing prices are repored in able 8, where he op panel assumes a consan demographic srucure and he boom panel considers a ime-varying populaion. Firs, able 8 shows ha, given he growh rae of housing prices (i.e., he columns), he aggregae saving rae decreases as he growh rae of income increases. his is consisen wih he permanen income hypohesis. Second, he aggregae saving rae increases when housing prices are growing faser, given he income growh (i.e., he rows). he main reason for his increase is he exisence of borrowing consrains. hird, he aggregae saving rae is highes (as high as 8.34 percen) when he expeced fuure income growh rae is 8 percen and ha of housing prices is 2 percen. However, if we reduce he down paymen requiremen from 5 percen o 33 percen, he aggregae saving rae becomes essenially zero. Even if he down paymen remains 5 percen, aking ino accoun China s demographic srucure (lower panel in able 8) also reduces he implied aggregae saving rae from 8.34 percen o.4 percen. herefore, unless people expec ha (i) housing prices will grow much faser han 2 percen per year, (ii) fuure income growh is significanly lower han 8 percen per year, and (iii) he borrowing consrains are more severe han he 5 percen down paymen requiremen, housing prices canno explain China s persisenly high aggregae household saving rae. Oher Possible Exensions Our analysis so far is based on a simple economic model. However, our simple model can be furher enriched. In his subsecion, we discuss some possible exensions and he likely effecs of such exensions on our resuls. Endogenous iming of Home Purchase. he opimal iming of home purchase in our model FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 8 3

18 is exogenous and is calibraed using he average homebuyer s age (working years). If we can make his variable endogenous, he model has he poenial o explain he difference in he opimal age of homebuyers across counries. However, even if his variable is endogenized, we sill need o calibrae he oher parameers so ha he model-prediced iming of home purchase maches ha in he daa. his is no much differen from exogenously seing = 5, as we did herein. herefore, even if were endogenous, our resuls would sill hold under similar calibraions. Inclusion of Wealh Effecs. In our simple model, a sheler is a pure consumpion good and generaes a consan lifeime uiliy. In realiy, a sheler is also a capial good because i may yield capial gains when housing prices appreciae, which may generae posiive wealh effecs. However, his simplificaion does no hur our analysis. If shelers were inroduced ino our model as a capial good (or durable consumpion good), he siuaion is he same for he would-be homebuyer cohors when he housing price increases; bu for he curren homeowners, i implies ha heir wealh would increase, which would decrease heir saving incenives and miigae he posiive impac of rising housing prices on lifeime savings. Such a wealh effec may explain why he aggregae household saving rae in developed counries has been declining over he pas decade. For example, Case, Quigley, and Shiller (26), whose empirical analysis is based on U.S. cross-counry and cross-sae daa, find ha for every percen increase in housing prices, he consumpion-o-income raio increases by. percen and he saving rae decreases by. percen. hese auhors explain heir findings based on he wealh effec. Hence, inroducing a wealh effec ino our model would only srenghen our conclusion ha rising housing prices canno explain China s high aggregae saving rae. Depreciaion Less han Percen. he previous analyses are based on he assumpion ha a house has zero marke value a he end of a homeowner s life. his assumpion is no realisic, bu i is an innocuous assumpion and does no affec our main resuls. he reason is simple: If homeowners could sell houses a he end of heir lifeimes, hey could hen borrow agains he home equiy o increase consumpion when young and use he proceeds from morgage sales o repay heir deb a he end of life. his would effecively relax borrowing consrains and reduce each individual s saving rae before buying a house. ore specifically, if he marke value of he house does no change over ime and can be collaeralized, an individual would hen have no need o save before purchasing a home, would incur a negaive saving rae (or posiive borrowing) equivalen o he marke value of he house when purchasing a home, and would incur a posiive saving rae when selling he home a he end of life. hus, he average lifeime saving rae would sill be zero. he Hump-Shaped Curve of Lifeime Income. Our model assumes ha household income is eiher consan or increasing over ime, bu in realiy income follows a life cycle wih an invered-u shape: Personal income peaks in middle age. However, our resuls are no sensiive o his income paern. Firs, in our model he measured income is household or family income, no individual income. Household income is less hump-shaped han individual income unless boh husband and wife are idenical wage earners. Second, and more imporan, he primary concern for a hump-shaped income profile is ha agens are more borrowing consrained a a young age. Bu in our model we have se he opimal age of home purchase as 35 (i.e., 5 years afer joining he workforce), which is roughly he peak year of lifeime income. hus, our calibraion makes he concern of borrowing consrains due o a hump-shaped income paern less relevan. In addiion, our calibraion of he down paymen requiremen of 5 percen has effecively overesimaed he acual degree of borrowing consrains; we showed ha, even under a 5 percen down paymen requiremen, he influence of rising housing prices on he aggregae saving rae is insignifican. Hence, aking ino accoun he invered-u curve of lifeime income should no change our resuls significanly. Bequess. In China, many parens give money o heir children o buy houses because he 8 4 ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW

19 children canno afford he high morgage coss. Hence, one popular view is ha such alruism raised China s aggregae saving rae. We can use a version of our simple model o show ha his view is incorrec because i again suffers from he fallacy of aggregaion. he inuiion is simple: Bequess from parens reduce heir children s need o save; hence, a he aggregae level, bequess may have lile effec on he average household saving rae. CONCLUSION Our analysis shows he following: (i) Wihou borrowing consrains and populaion growh, he aggregae household saving rae is essenially independen of rising housing prices. (ii) Accoun - ing for China s demographics reduces he aggregae saving rae because he raio of homebuyers o non-homebuyers has been increasing, which increases he weighs of he negaive savings of he homebuyers in aggregae savings. (iii) Under borrowing consrains he aggregae saving rae can become quie sensiive o housing prices; however, wih realisic degrees of borrowing consrains (such as allowing for a 5 percen down paymen), rising housing prices can generae an aggregae saving rae of 4.7 percen wihou considering he Chinese demographic srucure (his value becomes zero if he demographic srucure is aken ino accoun). hese values are oo small o explain China s 2 percen aggregae saving rae. herefore, our analysis clarifies a popular misundersanding or fallacy ha aribues he rapidly rising coss of living, such as housing, educaion, healh care, and so on, o China s high aggregae household saving rae. his view ignores he saving-expendiure cancellaion effec across cohors. If he rapidly rising housing prices and oher coss of living are no responsible for he persisenly high Chinese saving rae, wha facors acually cause such saving? We believe ha large uninsurable uncerainy and severe borrowing consrains in conjuncion wih rapid income growh may provide he answer o China s high household saving rae. For example, Wen (29) shows ha when individuals face large uninsured idiosyncraic risk and severe borrowing consrains, heir marginal propensiy o save becomes a posiive funcion of he growh rae of heir permanen income. hus, rapid income growh could imply an exremely high household saving rae when financial markes are incomplee. In paricular, Wen (29) shows ha a sandard buffer-sock saving model wih incomplee financial markes could generae a 3 percen aggregae household saving rae when he income growh rae is percen per year. In his case, an individual s expendiure does no compleely cancel his or her precauionary saving because of he need for a buffer sock a any momen in life. In oher words, i is opimal o always mainain a posiive sock of personal saving as self-insurance agains unpredicable shocks. Our findings also have some policy implicaions. Alhough rapidly rising housing prices may have adverse welfare effecs on would-be homebuyers, policies designed o reduce housing prices may be effecive in reducing he individual saving rae of young people bu will no be effecive in reducing he aggregae saving rae. In comparison, policies designed o reduce borrowing consrains and improve he efficiency of he financial sysem may prove more effecive in reducing he aggregae saving rae. FEDERAL RESERVE BANK OF S. LOUIS REVIEW ARCH/APRIL 2 8 5

20 REFERENCES Bai, Chong-en and Qian, Zhenjie. Facor Income Share in China: he Sory Behind he Saisics. Economic Research, 29, 3, pp Bernanke, Ben S. he Global Saving Glu and he U.S. Curren Accoun Defici. Remarks by Governor Ben S. Bernanke a he Sandridge Lecure, Virginia Associaion of Economics, Richmond, Virginia, arch, 25; Carroll, Chrisopher D.; Overland, Jody and Weil, David N. Saving and Growh wih Habi Formaion. American Economic Review, June 2, 9(3), pp Case, Karl E.; Quigley, John. and Shiller, Rober J. Comparing Wealh Effecs: he Sock arke versus he Housing arke. Berkeley Elecronic Journal of icroeconomics: Advances in acroeconomics, 25, 5(), Aricle. Chamon, arcos D. and Prasad, Eswar, S. Why Are Saving Raes of Urban Households in China Rising? American Economic Journal: acroeconomics, January 2, 2(), pp Chen, Kaiji; Imrohoroglu, Ayse and Imrohoroglu, Selahain. he Japanese Saving Rae. American Economic Review, December 26, 96(5), pp China acroeconomic Nework Daabase. China Populaion and Employmen Saisics earbook 28. Beijing: China Saisics Press, 28. China Saisical earbook 27. Beijing: China Saisics Press, 27. China Saisical earbook 28. Beijing: China Saisics Press, 28. Friedman, ilon. A heory of he Consumpion Funcion. Princeon, NJ: Princeon Universiy Press, 957. Greenspan, Alan. he Fed Didn Cause he Housing Bubble. Wall Sree Journal, arch, 29, p. A5; hp://online.wsj.com/aricle/sb hml. Hayashi, Fumio. Why Is Japan s Saving Rae So Apparenly High? in Sanley Fischer, ed., NBER acroeconomics Annual 986. Volume. Cambridge, A: I Press, pp He, Xinhua and Cao, ongfu. Undersanding he High Saving Rae in China. China and World Economy, 27, 5(), pp. -3. Horioka, Charles. Why Is Japan s Household Saving Rae So High? A Lieraure Survey. Journal of he Japanese and Inernaional Economics, arch 99, 4(), pp Horioka, Charles. and Wan, Hunmin. he Deerminans of Household Saving in China: A Dynamic Panel Analysis of Provincial Daa. Journal of oney, Credi, and Banking, December 27, 39(8), pp odigliani, Franco and Cao, Shi L. he Chinese Saving Puzzle and he Life-Cycle Hypohesis. Journal of Economic Lieraure, arch 24, 42(), pp ARCH/APRIL 2 FEDERAL RESERVE BANK OF S. LOUIS REVIEW