Demographic Patterns and Household Saving in China

This paper studies the effect that changing demographic patterns have had on the household saving rate in China. We undertake a quantitative investigation using an overlapping generations (OLG) model where agents live for 85 years. Consumers begin to exercise decision making when they are 18. From age 18 to 60, they work and raise children. Dependent children's utility enter into parent's utility where parents choose the consumption level of the young until they leave the household. Working agents give a portion of their labor income to their retired parents and save for their own retirement while the aged live on their accumulated assets and support from their children. Remaining assets are bequeathed to the living upon death. We parameterize the model and take future demographic changes, labor income and interest rates as exogenously given from the data. We then run the model from 1963 to 2009 and find that the model accounts for nearly all the observed increase in the household saving rate.