Imperfect Information and Saving in a Small Open Economy

Author/Editor:

Agustin Roitman ; Christian Daude

Publication Date:

March 1, 2011

Electronic Access:

Download PDF. Use the free Adobe Acrobat Reader to view this PDF file

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:

Emerging markets are more volatile and face different types of shocks, in size and nature, compared to their developed counterparts. Accurate identification of the stochastic properties of shocks is difficult. We show evidence suggesting that uncertainty about the underlying stochastic process is present in commodity prices. In addition, we build a dynamic stochastic general equilibrium model with informational frictions, which explicitly considers uncertainty about the nature of shocks. When formulating expectations, the economy assigns some probability to the shocks being temporary even if they are actually permanent. Parameter instability in the stochastic process implies that optimal saving levels (debt holdings) should be higher (lower) compared to a process with fixed parameters. Imperfect information about the nature of shocks matters when commodity GDP shares are high. Thus, economic policies based on misperception of the underlying regime can lead to substantial over/under saving with important associated costs.

Series:

Working Paper No. 11/60

Subject:

English

Publication Date:

March 1, 2011

ISBN/ISSN:

9781455221042/1018-5941

Stock No:

WPIEA2011060

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

48

Please address any questions about this title to publications@imf.org