Digital Financial Inclusion and Consumption Smoothing in China

30 Pages Posted: 7 May 2020

See all articles by Jennifer Lai

Jennifer Lai

Guangdong University of Foreign Studies

Isabel Kitming Yan

City University of Hong Kong (CityUHK) - Department of Economics & Finance

xingjian yi

Guangdong University of Foreign Studies

Hao Zhang

Guangdong University of Foreign Studies

Date Written: January–February 2020

Abstract

In this paper, we investigate the effect of digital financial inclusion (DFI) on household consumption smoothing in China. We use four waves of the biennial China Family Panel Studies from 2010 to 2016, during which time DFI has significantly developed alongside financial technology across China. We split household income shocks into permanent and transitory components, and evaluate if DFI may help households to buffer against these shocks. We find that households are not able to insure against permanent shocks to income, but they can smooth approximately 70 percent of transitory shocks to income. We also find that DFI has diminished households’ ability to insure against transitory income shocks. This is partly because online purchase may lead to the oversensitivity of consumption to income. In addition, we find that contrary to DFI, traditional financial sector development contributes to better household consumption smoothing against transitory income shocks.

Keywords: consumption smoothing, digital financial inclusion, insurance, permanent income shock, transitory income shock

JEL Classification: D14, E21, F61

Suggested Citation

Lai, Jennifer and Yan, Isabel Kitming and yi, xingjian and Zhang, Hao, Digital Financial Inclusion and Consumption Smoothing in China (January–February 2020). China & World Economy, Vol. 28, Issue 1, pp. 64-93, 2020, Available at SSRN: https://ssrn.com/abstract=3594718 or http://dx.doi.org/10.1111/cwe.12312

Jennifer Lai (Contact Author)

Guangdong University of Foreign Studies

Isabel Kitming Yan

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Xingjian Yi

Guangdong University of Foreign Studies

Hao Zhang

Guangdong University of Foreign Studies ( email )

Collaborative Innovation Center for Silk Road
Guangzhou, Guangdong
China

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