Assessing the Effects of Capital Account Liberalization on Savings

In this paper, I investigate the relationship between national saving rates and capital account liberalization for a panel of 102 countries over the time period 1996–2007, employing three different de jure measures of financial openness. My results indicate that the influence of capital account liberalization on national saving depends on the degree of domestic financial development as well as on initial capital account restrictions. Easing borrowing constraints in an underdeveloped domestic financial market lowers saving, as the negative effect from easier access to credit globally outweighs the positive effect of high interest rates on savings as the financial repression paradigm predicts; on the contrary, financial globalization under a highly developed domestic financial market provides mixed results driven by the ambiguous effect of interest rates on savings. In addition, initial capital account restrictions have proved catalytic in the effectiveness of tightening episodes, a fact that could potentially affect national saving patterns. More precisely, my results indicate that developed (developing) countries with not advanced financial markets starting their liberalization process with severe initial capital account restrictions, increase (decrease) their savings in response to liberalization while they reduce (increase) savings as the domestic financial market becomes more developed. Furthermore, waiving restrictions on capital inflows or outflows provides additional insights regarding national savings patterns as they are strongly connected to domestic national accounts and, thus, national saving. The further examination of liberalization episodes on inflows and outflows confirms the causal relationship between the current and the capital account.