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Cherif, Reda.

The Volatility Trap Precautionary Saving, Investment, and Aggregate Risk / Reda Cherif. [electronic resource] : Reda Cherif. - Washington, D.C. : International Monetary Fund, 2012. - 1 online resource (21 p.) - IMF Working Papers; Working Paper ; No. 12/134 . - IMF Working Papers; Working Paper ; No. 12/134 .

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.

ISBN: 1475503865 : 18.00 USD

ISSN: 1018-5941

Standard No.: 10.5089/9781475503869.001 doi

Subjects--Topical Terms:
Buffer-Stock
Correlation
Economic Growth and Aggregate Productivity: General
Growth
Investment Rate
Nonlinear Relationship

Subjects--Geographic Terms:
Bahrain
Bulgaria
Cameroon
Dominican Republic
Romania