The more a country saves, the less it invests as a share of saving. We build a "store-or-sow" model of growth with precautionary saving and investment to study the nonlinear relationship between investment and saving. We contend that income volatility is an important variable for explaining saving and investment dynamics. Our results indicate that as permanent volatility increases, both investment and saving increase until a threshold at which point investment plummets while precautionary

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... surges. In contrast, with larger volatility of temporary shocks, investment falls and precautionary saving gradually increases. Faced with high permanent volatility, big savers invest relatively little. JEL codes: E21, E22, D91, O40 . We are grateful to Christopher Carroll for valuable comments. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.