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Foreign Debt and Domestic Savings In Developing Countries

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  • Luke, Okafor
  • Joanna, Tyrowicz

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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Bibliographic Info

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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  1. Osei, B., 1995. "Ghana: The Burden of Debt service Payment Under Structural Adjustment," Papers, African Economic Research Consortium 33, African Economic Research Consortium.
  2. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt7g18546z, Center for International Economics, UC Santa Cruz.
  3. Mbire, B. & Atingi, M., 1997. "Growth and Foreign Debt: The Ugandan Experience," Papers, African Economic Research Consortium 66, African Economic Research Consortium.
  4. Léonce Ndikumana & James K. Boyce, 2002. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2002-02, University of Massachusetts Amherst, Department of Economics.
  5. Hajivassiliou, Vassilis A., 1987. "The external debt repayments problems of LDC's : An econometric model based on panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 36(1-2), pages 205-230.
  6. Sawada, Yasuyuki, 1994. "Are the heavily indebted countries solvent?: Tests of intertemporal borrowing constraints," Journal of Development Economics, Elsevier, Elsevier, vol. 45(2), pages 325-337, December.
  7. Menbere Workie Tiruneh, 2004. "An Empirical Investigation Into the Determinants of External Indebtedness," Prague Economic Papers, University of Economics, Prague, University of Economics, Prague, vol. 2004(3), pages 261-277.
  8. 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.
  9. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, Università di Perugia, vol. 2(3).
  10. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, Elsevier, vol. 60(2), pages 423-438, December.
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Cited by:
  1. Ondřej Šimpach & Jitka Langhamrová, 2013. "Forecasting Future Salaries in the Czech Republic Using Stochastic Modelling," Business Systems Research, Society for Promotion of Business Information Technology (BIT), vol. 4(2), pages 4-16.

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