IMF paper analyses savings and investment response to shocks

IMF headquarters in Washington DC

A working paper, published by the International Monetary Fund in May, examines the effect of permanent and temporary income shocks on precautionary savings and investment.

The authors, Reda Cherif and Fuad Hasanov, develop a "store or sow" model, finding that high volatility of permanent shocks leads to a high rate of saving and low investment in riskier assets, which the authors refer to as a "volatility trap". When the volatility of permanent shocks is low, however, saving is low and

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