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Nonlinear income variance profiles and consumption inequality over the life cycle

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Author Info

  • Abe, Naohito
  • Yamada, Tomoaki

Abstract

In contrast to many other countries, consumption inequalities in Japan are not constant over household age but increase from around middle age--a fact first highlighted by Ohtake and Saito [Ohtake, F., Saito, M., 1998. Population aging and consumption inequality in Japan. Rev. Income Wealth 44, 361-381]. Given this information, we examine whether this phenomenon is consistent with the standard precautionary saving model developed by Carroll [Carroll, C.D., 1997. Buffer-stock savings and the life cycle/permanent income hypothesis. Quart. J. Econ. 62, 1-56]. Specifically, we investigate: (1) the degree of age dependence of idiosyncratic income risks; and (2) the importance of age dependence for the evolution of inequalities in consumption predicted by the household model of Carroll (1997). We find a strong age dependence of income risks, which creates a nonlinear age-variance profile of income, and the standard precautionary saving model is consistent with the observed consumption inequalities as long as we take the nonlinearity in age-variance profiles of income into account.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 23 (2009)
Issue (Month): 3 (September)
Pages: 344-366

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Handle: RePEc:eee:jjieco:v:23:y:2009:i:3:p:344-366

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Web page: http://www.elsevier.com/locate/inca/622903

Related research

Keywords: Income risk Buffer stock savings Consumption inequality Method of simulated moments;

References

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Citations

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Cited by:
  1. Tomoaki Yamada, 2009. "Persistence of income shocks and consumption inequality: A case in Japan," Economics Bulletin, AccessEcon, vol. 29(4), pages 2822-2831.
  2. Yamada, Tomoaki, 2012. "Income risk, macroeconomic and demographic change, and economic inequality in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 63-84.
  3. Aleksandra Kolasa, 2012. "Life cycle income and consumption patterns in transition," National Bank of Poland Working Papers 133, National Bank of Poland, Economic Institute.
  4. Tomoaki Yamada & Minchung Hsu & Gary D. Hansen, 2011. "Financing Health Care in Japan: The Impact of an Aging Population," 2011 Meeting Papers 717, Society for Economic Dynamics.
  5. Yamada, Tomoaki, 2013. "Cross-sectional Facts in Japan using Keio Household Panel Survey," MPRA Paper 49813, University Library of Munich, Germany.
  6. Yamada, Tomoaki, 2011. "A politically feasible social security reform with a two-tier structure," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 199-224, September.

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