"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

The Chinese Saving Puzzle 183
3.3.2 Modeling Permanent Variation in the Per-Capita Income
Growth Rate
With respect to the productivity growth component, the basic hypothesis is stated
in (6.2). But there is a problem in that (6.2) has been shown to be an implication
of the LCH in the presence of a lasting and stable income growth trend. Now it
is obvious that in China the growth rate has been far from stable. Until the mid-
70s, it averaged around 2 percent. It then rose almost monotonically, reaching
over 10 percent in the early 90s and falling again in the late 90s. One possible
first approximation can be obtained by measuring the growth trend not by the
current or recent growth (which would be quite erratic), but by the average annual
growth over an extended period of past years. In principle the period should be
long, subject to the availability of data. In the case of China the data are an important
limitation, as our estimates of disposable income growth begin only in 1953
and end in 2000. We have 48 years of data. Using a really long period would
result in losing a large portion of our sample. We have settled for a compromise
by measuring the growth trend for every year and by using the average annual
rate of growth over the previous fourteen years (year one through year fifteen).
This procedure results in the loss of the first fifteen observations, leaving us with
a sample of 34 observations (1966–2000). However, many of the results presented
below have been obtained using the entire sample, and approximating the growth
trend of the missing previous fourteen years by the average annual growth rate
for all the years available, up to the given year. This procedure yields a sample
of 43 observations (1957–2000). This approximation is “courageous,” but the
early years are important because they are quite different from the later ones, and
we submit that the approach is unlikely to cause serious bias since, in the early
years, the growth is relatively constant and quite small.
The saving ratio and the per-capita income growth trend are shown in figure
6.4. The per-capita real income curve tracks remarkably closely with the wide
fluctuations of S/Y from its trough in the 60s to its peak in the mid-90s. At the
end, the S/Y decelerates faster than the growth trend. This difference will be
explained below. On the whole, the graph provides surprisingly strong support
for the LCH hypothesis as an explanation of Chinese saving.
The fifteen-year average growth rate is the basic variable used to estimate the
growth effect. We will provide some refinements of this measure, which takes
into account the possibility of differential effect for the more recent growth rates.
3.4 The Role of Inflation
3.4.1 Impact of Inflation on Measurement of Income and Saving
The presence of price variation (inflation) over the time period poses a number
of measurement problems. First, in the presence of significant inflation, one must