Imperfect Information and Saving in a Small Open Economy

49 Pages Posted: 22 Mar 2011

See all articles by Christian Daude

Christian Daude

affiliation not provided to SSRN

Agustin Roitman

International Monetary Fund (IMF)

Date Written: March 2011


Emerging markets are more volatile and face different types of shocks, in size and nature, compared to their developed counterparts. Accurate identification of the stochastic properties of shocks is difficult. We show evidence suggesting that uncertainty about the underlying stochastic process is present in commodity prices. In addition, we build a dynamic stochastic general equilibrium model with informational frictions, which explicitly considers uncertainty about the nature of shocks. When formulating expectations, the economy assigns some probability to the shocks being temporary even if they are actually permanent. Parameter instability in the stochastic process implies that optimal saving levels (debt holdings) should be higher (lower) compared to a process with fixed parameters. Imperfect information about the nature of shocks matters when commodity GDP shares are high. Thus, economic policies based on misperception of the underlying regime can lead to substantial over/under saving with important associated costs.

Keywords: Commodity prices, Economic models, Emerging markets, External shocks, Savings, Small states

Suggested Citation

Daude, Christian and Roitman, Agustin, Imperfect Information and Saving in a Small Open Economy (March 2011). IMF Working Papers, Vol. , pp. 1-48, 2011. Available at SSRN:

Christian Daude (Contact Author)

affiliation not provided to SSRN ( email )

Agustin Roitman

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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