Journal Issue
Working Paper Summaries (WP/93/1 - WP/93/54)

Summary of WP/93/31: “Savings, Growth, and Capital Markets Imperfections: The Case of Borrowing Constraints”

International Monetary Fund
Published Date:
August 1993
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The determinants of savings have long been a fundamental concern of economists and policymakers. Recent developments in the theory of economic growth that emphasize the importance of savings in sustaining long-run growth have made them the focus of renewed interest and suggest that understanding savings behavior may help in designing policy to promote economic growth.

The savings literature has highlighted the effects on savings of capital market imperfections, in particular, the effects of borrowing constraints, arguing that, when individuals are not allowed to borrow against future income, they will save more (or dissave less) than otherwise. This paper examines the corollary to this argument--namely, that the existence of borrowing constraints leads to higher growth. First, it is shown that borrowing constraints increase savings. Then, this result is incorporated into an endogenous growth model to illustrate other effects that borrowing constraints may have on growth. Although growth may be favored by high savings rates, it may be hindered by low productivity of accumulated physical capital, often caused by low investment in human capital. Whereas borrowing constraints may increase savings, and hence physical capital accumulation, they are likely to reduce the accumulation of human capital.

The paper cites the experience of the industrial countries to highlight the importance of the issue of savings, growth, and borrowing constraints. In particular, the Italian experience is seen as a clear case in which borrowing constraints have been associated with high savings rates. The paper compares the degree of capital market development, as well as savings, investment, and growth rates across the seven major industrial countries and also presents evidence of the correlation between human capital accumulation and the extent of borrowing constraints for the OECD countries.

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