Quantitative Analysis of the COVID-19 Pandemic Shock to Household Consumption in China

Abstract

We study the impact of the COVID-19 pandemic shock on household consumption in China. Using household survey data, we find that the proportion of liquidity-constrained households increases quickly, but the constraint levels vary across distinct groups. We build a heterogeneous agent life cycle incomplete market model to analyze the long-run and short-run effects of the pandemic shock. The quantitative results reveal a slow recovery of consumption due to three reasons: hiking unemployment rate, declining labor productivity, and worsening income stability. The hiking unemployment rate plays the key role in households’ consumption reduction since it simultaneously leads to a negative income effect and upsurging precautionary saving motives. Our paper highlights the importance of maintaining a stable labor market for faster recovery.

Keywords

COVID-19 / pandemic shock / household consumption / labor market / heterogeneousagentmodel / liquidity constraint / unemployment / quantitative analysis

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2020 Higher Education Press