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The Fall in Colombian savings during the 1990s. Theory and evidence

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  • Juan Carlos Echeverry

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Abstract

This After 1991 Colombia witnessed a sharp fall in the national savings rate (see figure 1.1), and in particular that of the private sector. Two hypotheses have been advanced for explaining this behavior. The first one stresses consumption smoothing within the Perrnanent Income Hypothesis framework (PIH). The reasons for such smoothing can be related with three major phenomena that characterized this period; namely, i. Since 1990 the government pursued an "apertura" (opening), consisting of tariff reductions, which the agents may have deemed as non-credible (transitory); hence, they exploited the advantage of purchasing imported goods at current low prices, expecting future rises in tariffs. ii. The agents believed in the apertura, but an overshooting of capital inflows led to an overvalued exchange rate, which, they expected, should be corrected at some point in the near future, with similar effects on current imports consumption. A similar effect on the real interest rate has been also claimed to have similar effects on total consumption (see Lopes et al, 1996). And iii. a predictable increase in income originated in fairly secure and substancial oil exports starting in 1997; this could lead oil exports revenues from $ 1.4 bn. yearly in 1991 (approximately 42% of total exports), to $ 4bn. after 1997. Such expected rise in income would have caused the observed increase in consumption. The second hypothesis is based on the relaxation of liquidity constraints (LCH), as a result of the capital inflows. Urrutia and Lopez (1994) argue that the increase in consumption was due to a relaxation in the liquidity constraints binding on an important share of the population (75% according to them). The inflow of capital experienced in the first years of the 1990s, and the monetary policy of that period would have allowed an increase in outstanding loans directed to consumption purposes. Cárdenas (1996) and Sánchez (1996) also present evidence in support of this hypothesis.

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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 003593.

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Length: 28
Date of creation: 31 Oct 1996
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Handle: RePEc:col:000094:003593

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  1. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy," IMF Working Papers 90/110, International Monetary Fund.
  2. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany.
  3. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
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  9. Chah, Eun Young & Ramey, Valerie A & Starr, Ross M, 1995. "Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence from Durable Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 272-87, February.
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  12. Alejandro López & Martha Misas & Hugo Oliveros, 1996. "Understanding Consumption in Colombia," BORRADORES DE ECONOMIA 003734, BANCO DE LA REPÚBLICA.
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Cited by:
  1. Andrés Escobar & Mauricio Cardenas, 1997. "Savings Determinants in Colombia: 1925-1994," Research Department Publications 3009, Inter-American Development Bank, Research Department.
  2. Guataqui, Juan Carlos & García-Suaza, Andrés Felipe & Rodríguez-Acosta, Mauricio, 2009. "Ahorro para el retiro en Colombia: patrones y determinantes," DOCUMENTOS DE TRABAJO 005792, UNIVERSIDAD DEL ROSARIO.
  3. Cardenas, Mauricio & Barrera, Felipe, 1997. "On the effectiveness of capital controls: The experience of Colombia during the 1990s," Journal of Development Economics, Elsevier, vol. 54(1), pages 27-57, October.
  4. Luis Fernando Melo Velandia & Franz Hamann Salcedo, 1998. "Inflacion Basica. Una Estimacion Basada En Modelos Var Estructurales," BORRADORES DE ECONOMIA 002848, BANCO DE LA REPÚBLICA.

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