A Model of Household Savings and Alternative Investments in Rural China

This paper explores the relationship between monetary policy, prices, and rural household savings and investment behavior in China. We first develop a two-period life-cycle model with bequests for China's rural economy to analyze the impacts of interest rates, agricultural product prices, and housing prices on rural households' capital allocation choices (households savings deposits, investment in private housing, and investment in agricultural productive fixed assets). We then empirically estimate the theoretical model equations with a newly compiled panel dataset covering the rural areas of 26 provinces from 2001 to 2016. Our empirical results suggest that high housing prices are harmful to the rural economy as they reduce productive investment and consumption. An efficient interest rate market and land tenure system reform are recommended.