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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front Econ Chin    2011, Vol. 6 Issue (1) : 157-170    https://doi.org/10.1007/s11459-011-0126-4
research-article |
An Empirical Analysis of Income Disparity and Consumption in China
Feng Lou(), Xuesong Li()
Institute of Quantitative & Technical Economics, Chinese Academy of Social Sciences, Beijing 100732, China
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Abstract

Using China’s provincial data from 1991 to 2005, this paper analyzes the impact of urban income disparity on their consumption based on static and dynamic panel data models and state space model. The GMM and Kalman Filter methods are used in the estimation and the variables such as income and price are controlled. The empirical results show that the elasticity of permanent income to consumption is much higher than that of temporary income; and the impact of income disparity on consumption is negative and substantial. A rise of 0.01 in the absolute value of Gini coefficient will cause a reduction of 0.35% in consumption on average. The effects fluctuate with the change of economic structure, consumption expectation and economic cycle. In the beginning years of 1990s, it is positive to enlarge income disparity moderately for consumption. It is the year of 1996 that the negative effect first appears in China. During 1998–2004, an increase of 0.01 to the absolute value of Gini coefficient will result in the reduction of consumption to fluctuate between 0.37% and 0.54%. In order to enlarge domestic demand and promote consumption, the focus should be the improvement of permanent income instead of temporary income, and the vigorous policies to reduce income disparity.

Keywords income disparity      consumption      panel data analysis      state space model     
Corresponding Authors: Feng Lou,Email:loufeng@cass.org.cn; Xuesong Li,Email:xsli@cass.org.cn   
Issue Date: 05 March 2011
 Cite this article:   
Xuesong Li,Feng Lou. An Empirical Analysis of Income Disparity and Consumption in China[J]. Front Econ Chin, 2011, 6(1): 157-170.
 URL:  
http://academic.hep.com.cn/fec/EN/10.1007/s11459-011-0126-4
http://academic.hep.com.cn/fec/EN/Y2011/V6/I1/157
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