Does Financial Reform Raise or Reduce Savings?
AbstractThe effect of financial liberalization on private saving is theoretically ambiguous, not only because the link between interest rate levels and saving is itself ambiguous, but also because financial liberalization is a multi-dimensional and phased process, sometimes involving reversals. Some dimensions, such as increased household access to consumer credit or housing finance, might also work to reduce private savings rather than increasing them. Furthermore, the long-term effect of liberalization on savings may differ substantially from the impact effect. Using Principal Components, we construct a 25-year time series index of financial liberalization for each of eight developing countries: Chile, Ghana, Indonesia, Korea, Malaysia, Mexico, Turkey and Zimbabwe. This is employed in an econometric analysis of private saving in these countries. We find that the pattern of effects differs across countries. In summary, liberalization appears to have had a significant positive direct effect on saving in Ghana and Turkey, and a negative effect in Korea and Mexico. No clear effect is discernible in the other countries. There is no evidence of significant, positive and sizeable interest rate effects. For the present, our results must be taken as an indication that there is no firm evidence that financial liberalization will increase saving. Indeed, under some circumstances, liberalization has been associated with a fall in saving. All in all, it would be unwise to rely on an increase in private savings as the channel through which financial liberalization can be expected to increase growth.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 413.
Length: 57 pages
Date of creation: 30 Oct 1998
Date of revision:
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financial reform; savings; financial liberalization; developing countries;
Other versions of this item:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-11-05 (All new papers)
- NEP-FMK-1998-11-05 (Financial Markets)
- NEP-MON-1998-11-05 (Monetary Economics)
- NEP-PKE-1998-11-05 (Post Keynesian Economics)
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