Household Saving: Micro Theories and Micro Facts

In this survey, we review the recent theoretical and empirical literature on household saving and consumption. The discussion is structured around a list of motives for saving and how well the standard theory captures these motives. We show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model. Particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior. We also discuss the "behavioral" or "psychological" approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving. We provide a section on facts: who save and how much. We then discuss informally the recent decline in the U.S. saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time. We do not find any convincing explanation for the change in saving rates. We also discuss some analyses of saving behavior over the life-cycle, addressing such questions as whether households save "enough" for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model. We also review a great number of studies of the consumption Euler equations. Based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income. We also examine in depth the recent empirical literature on the precautionary motive. We conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle, this motive is not so strong empirically as some investigators suggest.(This abstract was borrowed from another version of this item.)