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The volatility trap: why do big savers invest relatively little?

  • Cherif, Reda
  • Hasanov, Fuad

The more a country saves, the less it invests as a share of saving. We build a “store-or-sow” model of growth with precautionary saving and investment to study the nonlinear relationship between investment and saving. We contend that income volatility is an important variable for explaining saving and investment dynamics. Our results indicate that as permanent volatility increases, both investment and saving increase until a threshold at which point investment plummets while precautionary saving surges. In contrast, with larger volatility of temporary shocks, investment falls and precautionary saving gradually increases. Faced with high permanent volatility, big savers invest relatively little.

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File URL: https://mpra.ub.uni-muenchen.de/31286/1/MPRA_paper_31286.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31286.

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Date of creation: Mar 2011
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Handle: RePEc:pra:mprapa:31286
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  1. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
  2. Mark Aguiar & Gita Gopinath, 2004. "Emerging market business cycles: the cycle is the trend," Working Papers 04-4, Federal Reserve Bank of Boston.
  3. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  4. Borensztein, Eduardo & Jeanne, Olivier & Sandri, Damiano, 2009. "Macro-Hedging for Commodity Exporters," CEPR Discussion Papers 7513, C.E.P.R. Discussion Papers.
  5. Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," NBER Working Papers 12117, National Bureau of Economic Research, Inc.
  6. Reda Cherif & Fuad Hasanov, 2012. "Oil Exporters' Dilemma; How Much to Save and How Much to Invest," IMF Working Papers 12/4, International Monetary Fund.
  7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  8. Norman V. Loayza & Romain Rancière & Luis Servén & Jaume Ventura, 2007. "Macroeconomic Volatility and Welfare in Developing Countries: An Introduction," World Bank Economic Review, World Bank Group, vol. 21(3), pages 343-357, October.
  9. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1998. "The Feldstein-Horioka Puzzle and Capital Mobility: A Review," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(2), pages 169-88, April.
  10. Joshua Aizenman & Nancy Marion, 1995. "Volatility, Investment and Disappointment Aversion," NBER Working Papers 5386, National Bureau of Economic Research, Inc.
  11. Jerusalem D. Levhari & T. N. Srinivasan, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 36(2), pages 153-163.
  12. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  13. Gadi Barlevy, 2003. "The cost of business cycles under endogenous growth," Working Paper Series WP-03-13, Federal Reserve Bank of Chicago.
  14. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
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