An Econometric Analysis on Liquidity Constraints and Chinese Household Consumption Behaviours

Abstract

At the present stage, China is faced with insufficient consumption and excessive household savings. Although China have taken measures to stimulate consumption, the effect is not obvious. The underlying reasons wait to be probed into. Based on vector auto-regression model, impulse response function and the vector error correction model, this paper makes some valuable findings. The results show that interest rate has negative correlation with consumption. And the substitution effect of interest rate is greater than income effect; Current consumption is influenced by earlier consumption, which means there exists comparison effect and demonstration effect of consumption behaviors; There are liquidity constraints in household consumption behaviors and the increase of uncertainty and liquidity constraints results in the low increase of consumption and insufficient demand of China.