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International Monetary Fund and Yale University, respectively. The authors would like to thank Adolfo Barajas, Enzo Croce, Norman Loayza, Eduardo Lora, Nadeem UI Haque, Luis Servén, Andrés Solimano, and Klaus Schmidt-Hebbel for their valuable suggestions and comments. We also thank Farah Ebrahemi for her editorial assistance. This is a revised version of a paper prepared for a conference organized by the World Bank on September 16–18, 1998, and entitled “Saving in the World: Puzzles and Policies.” It is to be published in a volume devoted to the conference. Any remaining errors are those of the authors and not necessarily of the International Monetary Fund.
Preliminary evidence suggests that the decline in the private saving rate continued in 1996 and 1997. Still, since data from the National Accounts are revised frequently, this paper studies the behavior of saving only until 1995.
However, the National Accounts use a current account measure of saving. This is inconsistent with consumption theory, which is based on a capital account measure of saving obtained as the change in net wealth. Lopez (1997) shows that reliance on external saving to finance investment becomes less crucial in the 1990s if saving is adjusted by net capital gains from revaluations of assets and liabilities due to inflation and changes in the real exchange rate.
Permanent income is calculated as an arithmetic average of actual and future income, two periods into the future. Permanent government consumption is constructed using an identical procedure.
Depending on the regression, the dummy variable is 1 starting in 1990 or 1991. If the dummy variable is introduced in 1990, it is assumed that agents formed their expectations when the government announced the structural reforms. If the dummy variable is introduced in 1991, the assumption is that agents only changed their expectations when the reforms started to take place.
Taxes do not affect consumption in the regressions presented in Table 3. This result is inconsistent with the test developed in Section IV which finds that the timing of taxes matter, rejecting the Ricardian equivalence proposition.
The GOS generated by households includes profits of small industries that are not formal corporations (e.g. family industries, barbershops, shoe repair shops). It also includes income from home rental and from rent imputed to the home owner for living in the home (López, 1997).
The corporate veil test was performed for the period 1974—95 since the dividend series in Colombia have only been available since 1971.
The test was carried out using instrumental variables because the innovation in permanent income, εt is correlated with the innovation in income—OLS would have produced inconsistent estimates. Moreover, to avoid the presence of MA (1) in the errors induced by time aggregation in variables (Working, 1960), the instruments were dated t-2 and t-3. The instruments chosen were the second and third lags of adjusted disposable income, and the third lags of dividends and real interest rates. The instruments are significant according to Sargan’s test, as shown in Table 4.
From Ramirez’s work it would be possible to conclude that 40 percent of total income belongs to the 77 percent less wealthy individuals who presumably do not have access to credit. This result contrasts with the estimate obtained by López (1994), which suggests that between 61 percent and 75 percent of Colombian households disposable income is earned by liquidity constrained consumers. This difference has important policy implications. Financial liberalization would have significant impact on private saving if approximately 70 percent of total income is accrued by liquidity constrained consumers. But if a high number of individuals have no capital and insufficient income to save, financial liberalization would have to be very strong to have a significant effect on household savings.
According to a recent report (Misión de Mercado de Capitales, 1996), small firms do not go to the stock market because of fear of loosing control over their property. It seems more plausible, however, that it is not property that small corporations fear, but the knowledge that their capital will not be appropriately valued in a stock market where the forces of supply and demand are almost non existent.
This evidence contradicts the traditional belief that there was a sharp drop in public saving in the first half of the 1990s. Nonetheless, it hides the emergence of underlying balances created by the 1991 constitution. Indeed, increased revenue sharing under the process of fiscal decentralization mandated by the constitution contributed to the emergence of underlying imbalances as the central government continued to bear much of its original expenditure responsibilities.
In other words, Ricardian consumers treat bonds redeemed as equivalent to the present value of the implied decline in future taxes.
The following condition must be satisfied in order to add all the intertemporal budget constraints:
with the limit on the right going to zero. Conditions for this can be found in Barro (1974) and others.
For this hold, the following condition has to be assumed:
Using a Taylor approximation that assumes small changes in marginal utility across time of the CES utility function.
Approximating around c and if consumption does not vary much α = c−1/σ(l−l/σ)(r−δ)/(l+r).
γ = α β (1 + r)2/(r2 + 2r − δ − 1) and β = (1 + r)/(1 + δ).
In other words, the following process for income and government consumption are assumed: yt = ς + η yt−1 + εt, and gt = µ + ρ gt−1 + εt. Among others, similar strategies have been followed by Flavin (1981) and Muellbauer and Murphy (1989).
Using disposable income rather than labor income induces double counting in the return on wealth (Flavin, 1981).
To ensure a reasonable power of the Johansen procedure, the lag order of the VAR was tested. Starting with a fifth-order VAR, the F test and Shwartz information criteria only accepted to simplify to a fourth-order VAR.
This result can not be compared with that obtained for other developing countries. Studies for these countries usually ignore the effects of total wealth upon consumption because of the presence of imperfect capital markets (Ghatak and Ghatak, 1996). Still, even if credit restrictions are binding, wealth should affect consumption since it helps wealthy individuals to smooth their consumption over their life spans. Different forms of wealth have different propensities to consume depending on their liquidity (Pisarrides, 1976).