Unemployment Risk and Consumption: Can the Buffer Stock Saving Behavior Explain the Japanese Experience?

This paper showed that the drop of propensity to consume in Japan during the lost decade is attributable to increase of income risks, mainly due to rises in unenployment rate/ To asses the impacts of income risks, we used the buffer stock saving model and a numerical method. The buffer stock saving model has put aside effects of income risks on propensity to consume, while it stresses on determination of the target wealth. On the other hand, we focused on dynamics of propensity to consume in response to increases ofincome risks with explicit consideration of wealth distribution dynamics.