Iikka Korhonen, Bank of Finland: The paper develops a relatively standard model of portfolio allocation among rural Chinese households. Households have access to deposits, agricultural productive assets, and housing. They choose simultaneously the amount of consumption and fund allocation to each asset class. In each region the nominal deposit rate is the same, as it is set by the central authorities, but local inflation can vary.
After developing the model, the authors proceed to test the model's prediction with regional data. They find, among other things, that real interest rate supresses investment into housing stock, as can be expected. However, there are some counterintuitive results as well. For example, the increase in the price of agricultural products decreases agricultural capital stock. The authors speculate that this is because there is a lag from price signal to increase in investment in agricultural machinery, and so forth. This may very well be...