The impact of two-child policy on household savings in China and mechanisms

Abstract

ABSTRACT One-child policy has been accused of causing high saving rates in China, and this article provides direct evidences for the economic impact of the two-child policy on savings. Using China Migrants Dynamic Survey, we find the two-child policy significantly reduces the household saving rates by 1.96 percentage points in average and by 4.88 percentage points if the rural and ethnic minority groups excluded, and we also use IV and propensity score matching (PSM) estimation methods to test the robustness. Furthermore, the study shows that the two-child policy has a heterogeneous effect on the saving rates decreasing, which mainly occurs in the local hukou population group. From this perspective, the policy has a comprehensive and sustainable impact. Through mechanism analysis, we clarify that the two-child policy affects savings by increasing expenditure insignificantly; in addition to the direct effect, it mainly affects savings by transiently reducing family income. Abbreviations: IV: Instrumental variables; PSM: Propensity score matching; CPI: Consumer price index; OLS: Ordinary least squares