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The author is grateful to X. Sala-i-Martin, E. Spitaller, and J. van Houten for helpful comments.
For an overview of the different channels through financial markets affect growth and recent evidence on the positive relationship between financial market development and growth in a large cross section of countries see De Gregorio and Guidotti (1992), King and Levine (1992), and Roubini and Sala-i-Martin (1991).
See Ando et al. (1991) for further details on this argument.
The figures in Table 1 correct savings of the public and private sector for inflation. The correction for inflation is the product of the inflation rate and the net stock of public debt. This correction does not change significantly the figures for aggregate savings, because of the small magnitude of the Italian net foreign position, but it affects the composition between public and private savings. For this reason a country can have a budget deficit but a positive savings rate for the government.
This issue is analyzed in greater detail in Guiso, Jappelli, and Terlizzese (1991). The existence of liquidity constraints have also been used to explain savings behavior in the United States (e.g., Hubbard and Judd, 1986). The argument in this paper, however, refers to the relatively larger constraint in Italy’s capital market vis-à-vis other G7 countries. See also Muelbauer and Murphy (1990) for the United Kingdom, and Lehmussaari (1990), and Koskela and Viren (1992) for Nordic countries.
See also Campbell and Mankiw (1991) for additional estimates of the fraction of people that is subject to borrowing constraints and comparisons with related studies. However, the evidence from Jappelli and Pagano (1989), and Campbell and Mankiw (1991) has to be interpreted with caution. They identify liquidity constraint individuals with those that consume all of their income. As discussed in this paper, and the evidence from Ando et al. (1991) confirm, individuals subject to borrowing constraints do not necessarily consume all of their income. For consumption to be equal to income it is also necessary to have lending constraints, which do not exist. Finally, the expressions borrowing constraints and liquidity constraints are used interchangeably.
For the data in Tables 2 and 4, the coefficient of a regression of investment on savings is 0.86, and is not significantly different from one. For recent discussion on this topic see Bayoumi (1990), Feldstein and Bacchetta (1991), and Frankel (1991).
The only outlier excluded from the sample is Sweden.
This is equivalent to assume that labor is inelastically supplied. Normalizing first period labor supply to one, third period labor supply, in efficiency units, has to be equal to (1-θ) (1+r)2/θ.
The model could be extended to allow positive second period income and an increasing earnings profile. For this purpose it would be enough to assume that in the second period the consumer has to decide whether or not to purchase an indivisible good, D, at a relative price PD--in addition to ct, t+1. D would also report utility. For utility functions such that the purchase of this good is made (e.g., log(D)), total spending in the second period would be PDD + ct, t+1. Therefore, the same results that are discussed in the rest of the section would be obtained by assuming that second period spending is greater than second period income.
See De Gregorio (1992) for a general equilibrium model of growth with human capital accumulation and linear returns to education.
The analytics for the case of perfect capital markets are not presented because there is no closed form solutions for the rate of growth.
This framework could also be used to analyze the effects of public debt on growth by noting that in the presence of public debt total financial wealth is equal to the stock of capital plus the stock of public debt.