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The Savings Trap and Economic Take-Off

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Author Info

  • Atish R. Ghosh
  • Carlos M. Asilis

Abstract

We develop an overlapping generations model of a developing economy in which ‘culture’ and technology interact to determine savings, investment and growth. Investment is assumed to involve intermediation or other costs which may, in each period, result in either of two stable equilibria for the savings rate. At the “good” equilibrium, savings and growth are higher than at the “bad” equilibrium, whether the country attains the good or bad equilibrium in any period depends on each individual’s belief about the savings behavior of other agents in the economy. The model implies that fiscal policy or public activities to facilitate private investment can influence saving. In particular, a sustained period of fiscal restraint can shift the economy onto a higher savings and growth path.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/91.

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Length: 55
Date of creation: 01 Nov 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/91

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Related research

Keywords: Savings; Private savings; Economic growth; Economic models; capital stock; rate of return; increasing returns; foreign capital; real interest rates; capital equipment; international capital flows; investment projects; risk aversion; cost of capital; investors; capital formation; private investment; capital flows; international capital; investment functions; capital mobility; exogenous shocks; fixed costs; domestic investment; investment requirements; foreign direct investment; capital income; credit markets; domestic saving; rates of return;

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Cited by:
  1. Prof. Dr. Robert Holzmann, 1994. "Funded and Private Pensions for Eastern European Countries in Transition?," Public Economics 9405004, EconWPA.
  2. Timothy D. Lane & Leslie Lipschitz & Cristina Arellano & Ales Bulir, 2005. "The Dynamic Implications of Foreign Aid and its Variability," IMF Working Papers 05/119, International Monetary Fund.
  3. Nohra Rey de Marulanda & Julio Guzmán, 2003. "Inequidad, desarrollo humano y política social: Importancia de las "Condiciones Iniciales"," IDB Publications 10598, Inter-American Development Bank.

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