Cherif, Reda and Hasanov, Fuad (2011): The volatility trap: why do big savers invest relatively little?
Download (459kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||The volatility trap: why do big savers invest relatively little?|
|Keywords:||volatility, precautionary saving, buffer-stock, investment|
|Subjects:||E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth
O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General
|Depositing User:||Fuad Hasanov|
|Date Deposited:||05. Jun 2011 23:36|
|Last Modified:||16. Feb 2013 10:55|
Aghion, P., P. Bacchetta, R. Rancière and K. Rogoff, 2009, “Exchange rate volatility and productivity growth: The role of financial development,” Journal of Monetary Economics 56, 494-513.
Aguiar, M. and G. Gopinath, 2007, “Emerging Market Business Cycles: The Cycle Is the Trend,” Journal of Political Economy 115, 69-102.
Aiyagari, R., 1994, “Uninsured Idiosyncratic Risk and Aggregate Saving,” The Quarterly Journal of Economics 109, 659-84.
Aizenman, J. and N. Marion, 1995, “Volatility, Investment and Disappointment Aversion,” NBER working papers 5386.
Barlevy, G. 2004, “The Cost of Business Cycles Under Endogenous Growth,” American Economic Review 94, 964-990.
Borensztein, E., O. Jeanne and D. Sandri, 2009, “Macro-Hedging for Commodity Exporters,” NBER working papers 15452.
Carroll, C. 2001, “A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version),” NBER working papers 8387.
Cherif, R. and F. Hasanov, 2011, “The Oil Exporters’ Dilemma: How Much to Save and How Much to Invest,” working paper.
Coakley, J., F. Kulasi, and R. Smith, 1998, “The Feldstein-Horioka Puzzle and Capital Mobility: A Review,” International Journal of Finance & Economics 3, 169-88.
Durdu, C., E. Mendoza, and M. Terrones, 2009, “Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism,” Journal of Development Economics 89, 194-209.
Feldstein, M. and C. Horioka, 1980, “Domestic Saving and International Capital Flows”, Economic Journal 90, 314–329.
Fogli, A. and F. Perri, 2008, “Macroeconomic Volatility and External Imbalances”, Mimeo.
Levhari, D. and T. N. Srinivasan, 1969, “Optimal Savings under Uncertainty,” The Review of Economic Studies 36, 153-163.
Loayza, N., R. Rancière, L. Servén, and J. Ventura, 2007, “Macroeconomic Volatility and Welfare in Developing Countries: An Introduction,” World Bank Economic Review 21 343-357.
Lucas, R., 2003, “Macroeconomic Priorities,” American Economic Review 93, 1-14.
Obstfeld, M. and K. Rogoff, 1996, “Foundations of International Macroeconomics,” MIT Press Books.
Ramey, G. and V. Ramey, 1995, “Cross-Country Evidence on the Link between Volatility and Growth,” American Economic Review 85, 1138-51.
Rothschild, M. and J. Stiglitz, 1971, “Increasing risk II: Its economic consequences,” Journal of Economic Theory 3, 66-84