Does Financial Reform Increase or Reduce Savings?

61 Pages Posted: 20 Apr 2016

See all articles by Gerard Caprio

Gerard Caprio

Williams College

Patrick Honohan

Trinity College Dublin - Department of Economics; Peter G. Peterson Institute for International Economics; Centre for Economic Policy Research (CEPR)

Oriana Bandiera

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Date Written: November 30, 1999

Abstract

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 gcaprio@worldbank.org.

Suggested Citation

Caprio, Gerard and Honohan, Patrick and Bandiera, Oriana and Schiantarelli, Fabio, Does Financial Reform Increase or Reduce Savings? (November 30, 1999). World Bank Policy Research Working Paper No. 2062. Available at SSRN: https://ssrn.com/abstract=620664

Gerard Caprio (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

Patrick Honohan

Trinity College Dublin - Department of Economics ( email )

Dublin 2
Ireland

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

33 Great Sutton St,
Clerkenwell,
London, EC1V 0DX
United Kingdom

Oriana Bandiera

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7519 (Phone)
+44 20 7055 6951 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Fabio Schiantarelli

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-4512 (Phone)
617-552-2308 (Fax)

HOME PAGE: http://https://sites.google.com/a/bc.edu/fabio-schiantarelli/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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