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Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.

Business cycles --- Equilibrium (Economics) --- Globalization. --- Mathematical models. --- Global cities --- Globalisation --- Internationalization --- International relations --- Anti-globalization movement --- Exports and Imports --- Macroeconomics --- Globalization --- International Investment --- Long-term Capital Movements --- Macroeconomics: Consumption --- Saving --- Wealth --- Globalization: General --- International economics --- Foreign assets --- Sudden stops --- Precautionary savings --- Consumption --- Balance of payments --- External position --- National accounts --- Investments, Foreign --- Capital movements --- Saving and investment --- Economics --- Mexico

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In Bulgaria, Hungary, and Poland, the higher the relative household income is, the higher the savings rate is. But, surprisingly, savings rates appear to be unaffected by either sector of employment (public or private) or form of employment. Savings rates are significantly higher for households that do not own their own homes or that own few of the standard consumer durables - possibly because, with no retail credit or mortgage markets, households must save to purchase houses and durables; During the transition from central planning to market economies now under way in Eastern Europe, output levels first collapsed by 40 to 50 percent in most countries, then staged a modest recovery in the last two years. Longer-term revival of growth requires a resumption of investment and thus, realistically, of domestic savings. To explore the determinants of household savings rates in transition economies, Denizer, Wolf, and Ying studied matching household surveys for three Central European economies: Bulgaria, Hungary, and Poland. They find that savings rates strongly increase with relative income, suggesting that increasing income inequality may play a role in determining savings rates. Savings rates are significantly higher for households that do not own their homes or that own few of the standard consumer durables - possibly because, with no retail credit or mortgage markets, households must save to purchase houses and durables. The influence of demographic factors broadly matches earlier findings for developing countries. Perhaps surprisingly, variables associated with the household's position in the transition process - including either sector of employment (public or private) or form of employment - do not play a significant role in determining savings rates. This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to understand determinants of savings, at both the household and the aggregate level.

Bank --- Consumer --- Debt Markets --- Earnings --- Economic Theory and Research --- Emerging Markets --- Finance and Financial Sector Development --- Financial Literacy --- Future Income --- Household Expenditure --- Household Savings --- Income --- Incomes --- Lifetime --- Macroeconomics and Economic Growth --- Market Economies --- Poverty Reduction --- Precautionary Savings --- Private Sector Development --- Productivity --- Purchases --- Rapid Growth --- Retail Cred Savings Behavior --- Rural Development --- Rural Poverty Reduction --- Savings Rates --- Social Welfare --- Unemployment --- Wages

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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.

Saving and investment --- Prices --- Accumulation, Capital --- Capital accumulation --- Capital formation --- Investment and saving --- Saving and thrift --- Capital --- Supply-side economics --- Wealth --- Investments --- Econometric models. --- Banks and Banking --- Exports and Imports --- Macroeconomics --- Macroeconomics: Consumption --- Saving --- International Finance: General --- Open Economy Macroeconomics --- Interest Rates: Determination, Term Structure, and Effects --- International Investment --- Long-term Capital Movements --- Finance --- International economics --- Precautionary savings --- Consumption --- Real interest rates --- Foreign assets --- National accounts --- Financial services --- External position --- Economics --- Interest rates --- Investments, Foreign --- Mexico

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Policymakers in oil-exporting countries confront the question of how to allocate oil revenues among consumption, saving, and investment in the face of high income volatility. We study this allocation problem in a precautionary saving and investment model under uncertainty. Consistent with data in the 2000s, precautionary saving is sizable and the marginal propensity to consume out of permanent shocks is below one, in stark contrast to the predictions of the perfect foresight model. The optimal investment rate is high if productivity in the tradable sector is high enough.

Exports --- Petroleum --- Saving and investment --- Accumulation, Capital --- Capital accumulation --- Capital formation --- Investment and saving --- Saving and thrift --- Capital --- Supply-side economics --- Wealth --- Investments --- Coal-oil --- Crude oil --- Oil --- Caustobioliths --- Mineral oils --- International trade --- Econometric models. --- Macroeconomics --- Production and Operations Management --- Macroeconomics: Consumption --- Saving --- Investment --- Intangible Capital --- Capacity --- Fiscal Policy --- Intertemporal Consumer Choice --- Life Cycle Models and Saving --- Aggregate Factor Income Distribution --- Macroeconomics: Production --- Income --- Consumption --- Income shocks --- Precautionary savings --- Productivity --- Economics --- Industrial productivity

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Heightened uncertainty since the onset of the Great Recession has materially increased saving rates, contributing to lower consumption and GDP growth. Consistent with a model of precautionary savings in the face of uncertainty, we find for a panel of advanced economies that greater labor income uncertainty is significantly associated with higher household savings. These results are robust to controlling for other determinants of saving rates, including wealth-to-income ratios, the government fiscal balance, demographics, credit conditions, and global growth and financial stress. Our estimates imply that at least two-fifths of the sharp increase in household saving rates between 2007 and 2009 can be attributed to the precautionary savings motive.

Saving and investment --- Global Financial Crisis, 2008-2009 --- Global Economic Crisis, 2008-2009 --- Subprime Mortgage Crisis, 2008-2009 --- Financial crises --- Accumulation, Capital --- Capital accumulation --- Capital formation --- Investment and saving --- Saving and thrift --- Capital --- Supply-side economics --- Wealth --- Investments --- Econometric models. --- Labor --- Macroeconomics --- General Aggregative Models: Keynes --- Keynesian --- Post-Keynesian --- Business Fluctuations --- Cycles --- Current Account Adjustment --- Short-term Capital Movements --- Economic Growth of Open Economies --- Macroeconomics: Consumption --- Saving --- Aggregate Factor Income Distribution --- Personal Income, Wealth, and Their Distributions --- Unemployment: Models, Duration, Incidence, and Job Search --- Labour --- income economics --- Income --- Disposable income --- Consumption --- Precautionary savings --- Unemployment rate --- National accounts --- National income --- Economics --- Unemployment --- United States