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Foreign Debt and Domestic Savings In Developing Countries

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Author Info
Luke, Okafor
Joanna, Tyrowicz

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Abstract

This paper approaches the question of potential causality between foreign debt and domestic savings in the context of developing countries. Literature provides evidence in as far as foreign debt and development is concerned, but little attention was given so far to internal potential for capital formation. We provide a theoretical framework and test its relevance using 1975-2004 data for two groups of countries: sub-Saharan Africa and Latin America with the Caribbean. With the use of instrumental variables we find negative impact of foreign debt on domestic savings especially in the long run. The results are not susceptible to the choice of countries or outliers. However, the relationship between foreign debt and savings seems to depend on debt accumulation gaining significance only after passing a country specific threshold.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14819.

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Date of creation: Sep 2008
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Publication status: Published in Latin American Business Review 9.3/4(2008): pp. 189-226
Handle: RePEc:pra:mprapa:14819

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Keywords: Africa; foreign debt; domestic savings; Latin America; MIU;

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Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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  1. Befekadu Degefe, 1992. "Growth and foreign debt: the Ethiopian experience: 1964-86," Research Papers RP_13, African Economic Research Consortium. [Downloadable!]
  2. Joshua Aizenman & Brian Pinto & Artur Radziwill, 2004. "Sources for Financing Domestic Capital is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series 1007, Department of Economics, UC Santa Cruz. [Downloadable!]
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  3. Menbere Workie Tiruneh, 2004. "An Empirical Investigation Into The Determinants Of External Indebtedness," Prague Economic Papers, University of Economics, Prague, vol. 2004(3), pages 261-277. [Downloadable!] (restricted)
  4. Rockerbie, Duane W, 1994. "Did the Debt Crisis Cause the Investment Crisis? Further Evidence," Applied Economics, Taylor and Francis Journals, vol. 26(7), pages 731-38, July.
  5. Erdal Karagol, 2002. "The Causality Analysis of External Debt Service and GNP : The Case of Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 39-64. [Downloadable!]
  6. Mbire, B. & Atingi, M., 1997. "Growth and Foreign Debt: The Ugandan Experience," Papers 66, African Economic Research Consortium.
  7. Léonce Ndikumana & James K. Boyce, 2002. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," Working Papers 2002-02, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
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  8. Sawada, Yasuyuki, 1994. "Are the heavily indebted countries solvent?: Tests of intertemporal borrowing constraints," Journal of Development Economics, Elsevier, vol. 45(2), pages 325-337, December. [Downloadable!] (restricted)
  9. Osei, B., 1995. "Ghana: The Burden of Debt service Payment Under Structural Adjustment," Papers 33, African Economic Research Consortium.
  10. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December. [Downloadable!] (restricted)
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