The Volatility Trap: Precautionary Saving, Investment, and Aggregate Risk

May 1, 2012

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Reda Cherif, and Fuad Hasanov. The Volatility Trap: Precautionary Saving, Investment, and Aggregate Risk, (USA: International Monetary Fund, 2012) accessed September 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study the effects of permanent and temporary income shocks on precautionary saving and investment in a "store-or-sow" model of growth. High volatility of permanent shocks results in high precautionary saving in the safe asset and low investment, or a "volatility trap." Namely, big savers invest relatively little. In contrast, low volatility of permanent shocks leads to low precautionary saving and high or low investment, depending on the volatility of temporary shocks. Empirical evidence shows a nonlinear relationship between investment and saving and that investment is a hump-shaped function of the volatility of permanent shocks, as predicted by the model.

Subject: Agricultural commodities, Balance of payments, Commodities, Current account surpluses, Income, Income shocks, National accounts, Precautionary savings

Keywords: Agricultural commodities, Buffer-stock, Current account surpluses, Global, Growth, Income, Income shocks, Investment, Investment rate, Investment-saving correlation, Investment-saving ratio, Precautionary saving, Precautionary savings, Rate, Risk, Saving, Saving rate, Saving-investment balance, Volatility, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/134
Stock No:

WPIEA2012134
ISBN:

9781475503869
ISSN:

1018-5941

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