China's economic fluctuations and consumption smoothing: Is consumption more volatile than output in China?

Abstract

This paper provides a fundamental study of China's consumption and output fluctuations. The most recent literature reports that, in the post-1978 period, detrended consumption is significantly more volatile than detrended output in China. This indicates the inability to impose consumption smoothing. However, in those previous studies, consumption of durables, which has some features of capital, as discussed in the real business cycle literature, was not separated from private consumption. This paper is the first to estimate consumer durables for China and their service values following the method introduced in Cooley and Prescott (1995). We adjust the consumption measure to make it consistent with the real business cycle literature, and find that consumption of durables is much more volatile than output, but non-durable consumption is less volatile than, and less correlated with, output that provides evidence that supports consumption smoothing in China.