The Size of the Precautionary Component of Household Saving: China and the U.S.

We decompose the household saving rate into precautionary and non-precautionary components. When applied to Chinese households, who save 30% of disposable income, the precautionary motive accounts for two-thirds of that saving rate. For some admissible parameter values, the saving rate increases with the growth rate of income thus helping to explain why fast growing economies also have high saving rates. A finite-lifetimes version of the model produces the U-shaped age-saving rate profile observed in Chinese household data. Comparative calculations for U.S. households indicate that to match the U.S. data, the non-borrowing constraint must be relaxed.