Precautionary Saving Due to Income Risk: Theory and Evidence

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Economic theory, as well as ordinary intuition, indicates that uncertainty about future income should have important effects on people's consumption and savings decisions. Such effects of uncertainty on consumption choices are of more than theoretical significance, since they could have an important influence on (1) the effect of social and private insurance on the saving rate, (2) the effect of government debt on risky investment, (4) the effect of movements in wealth on consumption, and (5) the effects of short-term and long-term real interest rates on the level and rate of growth of consumption. The purpose of this project is to develop and analyze models of consumption under conditions of uncertainty. Previous research has focused on relatively simple tow period models. This project well involve the use of more realistic multi-period models. The models will be analyzed by the use of simulations to estimate the effects of precautionary saving behavior.