Does Financial Reform Increase or Reduce Savings?
Gerard Caprio Jr.
Central Bank of Ireland; Trinity College Dublin - Department of Economics; University of Dublin - Institute for International Integration Studies (IIIS); Centre for Economic Policy Research (CEPR)
London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Boston College - Department of Economics; Institute for the Study of Labor (IZA)
November 30, 1999
World Bank Policy Research Working Paper No. 2062
How financial liberalization affects private saving is theoretically ambiguous, because the link between savings and interest-rate levels is ambiguous and because financial liberalization is a phased, multidimensional process, which sometimes involves reversals. Some dimensions of the process - such as increased household access to housing finance or consumer credit - might reduce rather than increase private saving. And liberalization's long-term effect on saving may differ substantially from its initial effect.
Using Principal Components, Bandieri, Caprio, Honohan, and Schiantarelli construct a 25-year time series index of financial liberalization for each of eight developing countries: Chile, Ghana, Indonesia, the Republic of Korea, Malaysia, Mexico, Turkey, and Zimbabwe. They use it in an econometric analysis of private saving in those countries.
They find that the pattern of effects differs across countries. In sum, liberalization seems to have had a significant positive direct effect on saving in Ghana and Turkey and a negative effect in Korea and Mexico. No clear effect is discernible in the other countries. There is no evidence of significant, positive, and sizable interest-rate effects.
Their results must be taken as an indication that there is no firm evidence that financial liberalization will increase saving. Indeed, under some circumstances, liberalization will be associated with a drop in saving. All in all, it would be unwise to rely on increased private saving as a channel through which financial liberalization can be expected to increase growth. Instead, improved resource allocation must be the primary channel.
This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to analyze the effects of financial liberalization. Gerard Caprio may be contacted at email@example.com.
Number of Pages in PDF File: 61working papers series
Date posted: December 14, 2004
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