Demographic Changes, Household Savings and Economic Growth in All China: A Time-Series Approach

Abstract: This paper investigates the effects of population age structure and economic growth on the household saving rate in China and examines whether life cycle hypothesis (LCH) holds in the country like China, where LCH may be less applicable. By applying two popular time series econometric techniques (cointegration technique and vector error correction model), the author examines the long-run convergence between household saving rate, age structure of population and GDP growth in all China from 1963 to 2006. The empirical findings can be summarized as follows. Firstly, there exists a long-run steady-state relationship between them. Secondly, both the youth dependency ratio and old dependency ratio have a negative and significant impact on the household saving rate, while the GDP growth rate have a positive effect on the household saving rate. Therefore, the results support the life cycle hypothesis (LCH). Thirdly, with regards to the vector error correction model (VECM), the estimation results show that all variables expect youth dependency ratio (YDR) will not have a significant adjustment to a new equilibrium if there is a disturbance occurred in the whole system.