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

Reda Cherif and Fuad Hasanov

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: volatility; precautionary saving; buffer-stock; investment (search for similar items in EconPapers)
JEL-codes: E22 E21 O40 (search for similar items in EconPapers)
Date: 2011-03
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