Understanding Saving: Evidence from the United States and Japan.

• Author: Lusardi, Annamaria

By Fumio Hayashi.

Cambridge, MA: MIT Press, 1997. Pp. x, 510. $50.00.

In this book, Hayashi collects his work of consumption and saving over the past 15 years. In this respect, this is a unique testimony of the work and debate on consumption and saving during the 1980s and 1990s. This book is an important resource for several reasons. First, it focuses on useful extensions and modifications of the simple life cycle model. For example, it takes into account imperfections in the financial markets and the effects they can have on consumption/saving decisions. Second, it goes beyond the finite horizon framework and considers how generations are linked together. Third, it proposes new ways to estimate the predictions of theoretical models and provides a very careful and thorough empirical work. Fourth, it studies and compares the experience of the United States and Japan. Japan is a country of special interest; it has one of the highest saving rates, and its institutions and structure make it an ideal case study to analyze saving models. Overall, this book is an invaluable source for researchers working in both macro- and microeconomics.

One common feature of many chapters in this book is the use of micro data. Even when looking at issues relevant at the macro level, Hayashi uses mostly household data. This has many advantages: He can not only look into the reasons for the failure of the life cycle-permanent income model but, most important, can directly test the theoretical predictions of the model since they pertain to the individual level. Another common feature is the use of rich and extensive data sets, in particular, some of the Japanese ones that report very detailed and sometimes unique information about consumption.

In many of the chapters of this book, Hayashi proposes an innovative and thorough empirical work from which many other researchers have learned and borrowed. Just as an additional indication of the care put into the empirical work, he often updates the estimation of the papers that were published some years ago and adds the new estimates and revisions in an appendix. Although results hardly change, the reader should praise the precision, care, and rigor used by the author.

The book is divided into three main sections: the first on liquidity constraints, the second on risk sharing and altruism, and the third on Japanese saving behavior. In the first section, Hayashi investigates the predictions of the rational expectations-permanent income hypothesis (PIH) and whether liquidity constraints can explain the empirical refutation of the model. The fact that financial markets are imperfect and that most households cannot borrow in the ways assumed by the theory is almost palpable. This adds some realism to an...