Home » The Volatility Trap: Precautionary Saving, Investment, and Aggregate Risk by Reda Cherif
The Volatility Trap: Precautionary Saving, Investment, and Aggregate Risk Reda Cherif

The Volatility Trap: Precautionary Saving, Investment, and Aggregate Risk

Reda Cherif

Published May 20th 2014
ISBN : 9781475570694
ebook
23 pages
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 About the Book 

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, orMoreWe 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.