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Ogaki: Department of Economics, Ohio State University; Ostry and Reinhart: Research Department, International Monetary Fund. Any views expressed in this paper are those of the authors and should not be attributed to the institutions with which they are affiliated. The authors wish to thank seminar participants at the IMF and Ohio State University, as well as Sergio Rebelo, Michael Sarel, Miguel Savastano, and Peter Wickham for helpful comments and suggestions, and Jared Romey for excellent research assistance.
For a view running contrary to the McKinnon-Shaw hypothesis, see Buffie (1982) and van Wijnbergen (1983). For an analysis of the Uruguayan experience with financial liberalization, see de Melo and Tybout (1986).
Ostry and Reinhart (1992) attributed these differences to the presence of more binding liquidity constraints in Africa and Latin America than in Asia. Using a reduced form approach, similar regional differences in the interest-rate sensitivity of saving were found by Gupta (1987).
On the basis of a similar argument, Rebelo (1992) argues that financial liberalization in low-income developing countries is unlikely to produce large effects on saving and economic growth. For a discussion of the effects of financial market deregulation in developing countries, see Galbis (1993). For an analysis that highlights stylized facts concerning the differences in saving behavior between low- and middle-income developing countries, see two recent World Bank volumes (World Bank (1993, 1994)), dealing respectively with the performance of the economies of East Asia and Africa.
Deaton (1989) has also emphasized the importance of liquidity constraints in explaining consumption/saving behavior in developing countries.
Vaidyanathan (1993) also found that financial liberalization in developing countries reduced the severity of borrowing constraints. Although no direct tests were undertaken, the implication would be that financial liberalization, by reducing the fraction of households for which liquidity constraints are binding, should increase the interest-rate sensitivity of private saving. For a direct test of this hypothesis, see Bayoumi (1993) for the case of the United Kingdom, and Ostry and Levy (1994) for the case of France.
In addition to policy-induced shocks, the transmission of a temporary terms of trade disturbance, through its effect on the consumption rate of interest, depends crucially on the sensitivity of saving to intertemporal relative prices (see, for example, Svensson and Razin (1983) and Ostry (1988)). In the area of commercial policies, noncredible liberalizations will also generate changes in consumption rates of interest as households may view the reduction in import prices (associated with tariff reductions) as a temporary phenomenon (see, for example, Razin and Svensson (1983), Calvo (1987, 1988, 1989), Edwards and Ostry (1990) and Ostry (1991a,b)). The extent to which such noncredible liberalizations will induce a consumption boom (and a current account deterioration) therefore depends on the intertemporal elasticity of substitution in consumption. The finding that this parameter is low in a number of countries may help to rationalize the empirical findings of Ostry and Rose (1992) that tariffs have little systematic effects on saving and current account behavior. Finally, the transmission of fiscal policy changes (which engender movements in domestic interest rates) to the current account will be governed in part by the responsiveness of private saving to real interest rates (see, for example, Frenkel and Razin (1992) and Ostry (1994)).
This precautionary motive, without explicitly modelling liquidity constraints, is empirically investigated in Ghosh and Ostry (1994).
Income distribution within a country is often argued to exert an independent influence on saving behavior, but we are unaware of any systematic empirical investigation of this hypothesis.
For a fuller discussion of the underlying model at the national level, see Ostry and Reinhart (1992).