Precautionary Savings in a Small Open Economy Revisited

24 Pages Posted: 8 Nov 2011

See all articles by Agustin Roitman

Agustin Roitman

International Monetary Fund (IMF)

Date Written: November 2011

Abstract

A common assumption in standard economic models is that agents are risk-averse and prudent, and it is often argued that prudence is necessary to generate precautionary savings. This paper shows that prudence is not necessary to generate precautionary savings in small open economy models with more than two periods. A new class of preferences, which enables the isolation of the effect of risk aversion on precautionary savings, is introduced. The effects of changes in risk aversion, interest rates, and persistence and volatility of shocks on average asset holdings are qualitatively identical to the ones observed for standard constant-elasticity-of-substitution preferences. These results show that the almost universal assertion in the literature - that only prudent consumers can generate positive levels of precautionary savings - is simply incorrect.

Keywords: Borrowing, Forecasting models, Interest rates, Savings

Suggested Citation

Roitman, Agustin, Precautionary Savings in a Small Open Economy Revisited (November 2011). IMF Working Papers, Vol. , pp. 1-23, 2011. Available at SSRN: https://ssrn.com/abstract=1956400

Agustin Roitman (Contact Author)

International Monetary Fund (IMF) ( email )

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

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