This study examines how declining household savings in China affect fiscal and monetary policy effectiveness. Using a New Keynesian Dynamic Stochastic General Equilibrium model with Rule-of-Thumb (ROT) households and data from 2000Q1 to 2023Q3, the findings show that lower savings amplify policy impacts, boosting output, and consumption but increasing inflation. Fiscal policy effects become more pronounced with reduced savings. Robustness checks via Structural Vector Autoregression confirm these results. An extended model reveals that redistributing income to ROT households through capital taxes mitigates negative impacts. The study highlights the importance of considering household savings dynamics for effective policy design.
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