FAN Xuchun, ZHU Baohua:Permanent Shock,Transitory Shock and Consumption Volatility in China

Abstract：Using the method of permanent-transitory decomposition in random shock, this paper analyzes the impact of permanent shock and transitory shock on the volatility of consumption, assets and income in China based on the Vector Error Correction Model.The paper finds that the permanent shock can be used to completely explain the volatility of consumption, asset and income in China in the long run; in the short term (1~2 months), the transitory shock can explain about 30%~70% of volatility share in consumption, but it can only explain no more than 10% of the share in asset and income volatility.This paper shows that the long-term consumption growth results from the rapid growth of income and assets, but in the short term, the growth of income and assets has little effects on the consumption growth in China.To construct a long-term mechanism which can be used to promote the growth of consumption in China, this paper suggests that in the short time, it is essential to improve consumption environment and consumer expectation, and to eliminate all kinds of external factors which cause consumption volatility; in the long run, we need to fundamentally improve the level of asset values and income in household.In addition, this paper also provides a special perspective to explain that consumption volatility is greater than the output volatility in China.

Key words： Permanent Shock    Transitory Shock    Decomposition    Consumption Volatility

source:Finance & Trade Economics ,No.1,2015