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Exporters of exhaustible resources have historically exhibited higher income volatility than other economies, suggesting a heightened role for precautionary savings. This paper uses a parameterized small open economy model to quantify the role of precautionary savings in economies with exhaustible resources, when the only source of uncertainty is the price of the exhaustible resource. Results show that the precautionary motive can generate sizable external sector savings. When aggregated over the sample countries, precautionary savings in 2006 add up to 3.2 percent of GDP. The quantitative importance of the precautionary motive varies considerably across the sample countries and is driven primarily by the weight of exhaustible resource revenues in future income. The parameterized model fares well at capturing current account balances in both cross-section and time-series data.

Business & Economics --- Economic History --- Saving and investment --- Nonrenewable natural resources --- Mathematical models. --- Econometric models. --- Non-renewable natural resources --- Exhaustible resources --- Natural resources, Nonrenewable --- Economic aspects --- Natural resources --- Exports and Imports --- Macroeconomics --- Natural Resources --- Nonrenewable Resources and Conservation: General --- Macroeconomics: Consumption --- Saving --- Wealth --- Current Account Adjustment --- Short-term Capital Movements --- Environmental management --- International economics --- Non-renewable resources --- Precautionary savings --- Current account --- Consumption --- Current account balance --- Balance of payments --- Economics --- Norway

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The Q&A in this issue features seven questions on the role of precautionary savings in open economies (by Damiano Sandri); the research summaries are "The Macroeconomics of Aid (by Andrew Berg, Rafael Portillo, and Luis-Felipe Zanna) and "The Building Blocks to Measure Inflation" (by Mick Silver). The issue also lists the contents of the March 2011 issue of the IMF Economic Review, Volume 59 Number 1; visiting scholars at the IMF during January?March 2011; and recent IMF Working Papers and Staff Discussion Notes.

Investments: Metals --- Financial Risk Management --- Foreign Exchange --- Macroeconomics --- Public Finance --- Macroeconomics: Consumption --- Saving --- Wealth --- Price Level --- Inflation --- Deflation --- Financial Crises --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Currency --- Foreign exchange --- Economic & financial crises & disasters --- Public finance & taxation --- Investment & securities --- Precautionary savings --- Financial crises --- Real exchange rates --- Price indexes --- Public investment and public-private partnerships (PPP) --- National accounts --- Prices --- Expenditure --- Saving and investment --- Public-private sector cooperation --- United States

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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, 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.

Business & Economics --- Economic Theory --- Risk. --- Saving and investment. --- Accumulation, Capital --- Capital accumulation --- Capital formation --- Investment and saving --- Saving and thrift --- Capital --- Supply-side economics --- Wealth --- Investments --- Economics --- Uncertainty --- Probabilities --- Profit --- Risk-return relationships --- Investments: Commodities --- Exports and Imports --- Macroeconomics --- Macroeconomics: Consumption --- Saving --- Investment --- Intangible Capital --- Capacity --- Intertemporal Consumer Choice --- Life Cycle Models and Saving --- Economic Growth and Aggregate Productivity: General --- Aggregate Factor Income Distribution --- Current Account Adjustment --- Short-term Capital Movements --- Agriculture: General --- International economics --- Investment & securities --- Precautionary savings --- Income --- Income shocks --- Current account surpluses --- Agricultural commodities --- National accounts --- Balance of payments --- Commodities --- Saving and investment --- Farm produce --- United States

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In this paper we assess the implications of precautionary savings for global imbalances by considering a world economy model composed by the US, the Euro Area, Japan, China, oil-exporting countries, and the rest of the world. These areas are assumed to differ only with respect to GDP volatility which is calibrated based on the 1980-2008 period. The model predicts a wide dispersion in net foreign asset positions, with the highly volatile oil-exporting countries accumulating very large asset holdings. While heterogeneity in GDP volatility may lead to large imbalances in international investment positions, its impact on current accounts is much weaker. This is because countries are expected to move towards their optimal NFA at a very slow pace.

Saving and investment --- Gross domestic product --- Balance of payments --- Current account balance (International trade) --- International payments, Balance of --- Foreign exchange --- Terms of trade --- Balance of trade --- International liquidity --- Domestic product, Gross --- GDP --- Gross national product --- Accumulation, Capital --- Capital accumulation --- Capital formation --- Investment and saving --- Saving and thrift --- Capital --- Supply-side economics --- Wealth --- Investments --- Econometric models. --- Exports and Imports --- Macroeconomics --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- Macroeconomics: Consumption --- Saving --- International Investment --- Long-term Capital Movements --- International economics --- Current account --- Current account surpluses --- Current account imbalances --- Precautionary savings --- Foreign assets --- Investments, Foreign --- United States

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This Selected Issues paper estimates the optimal allocation of government current spending, precautionary saving, and investment for Kuwait under uncertainty. The results show that in the face of high oil income volatility and the expected decline in oil prices, projected current spending exceeds the optimal amount over the medium term (2013–2018). However, there is room to increase investment spending, which should contribute to the growth of the tradable sector, as the projected investment rate is lower than the optimal investment rate of 20 percent of government income.

Kuwait --- Koweit --- Kuwayt --- Kuvayt --- Kuveĭt --- Dowlat al Kuwait --- Dawlat al-Kuwayt --- State of Kuwait --- Economic conditions. --- Economic policy. --- Banks and Banking --- Investments: Energy --- Exports and Imports --- Labor --- Macroeconomics --- Finance: General --- Aggregate Factor Income Distribution --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Macroeconomics: Consumption --- Saving --- Wealth --- Energy: Demand and Supply --- Prices --- Energy: General --- Financial Institutions and Services: Government Policy and Regulation --- Banking --- Labour --- income economics --- Investment & securities --- Financial services law & regulation --- Finance --- Income --- Oil prices --- Consumption --- Precautionary savings --- National accounts --- Capital adequacy requirements --- Financial regulation and supervision --- Commercial banks --- Financial institutions --- Banks and banking --- Economics --- Saving and investment --- Asset requirements