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Prepared by Giovanni Dell’Ariccia and Leif Lybecker Eskesen.
See for example IMF: Asia Pacific Regional Outlook, September 2005.
See Monetary Authority of Singapore (2004)) for a discussion of long-term trends in the savings-investment balance.
Long-run multipliers are calculated as the ratio of the right-hand variable coefficients over one minus the coefficient of the lagged dependent variable.
A specification including interacted terms was estimated to allow the slope coefficients to vary after 1997. Each interacted term is the product of a dummy variable taking value 0 until 1997 and 1 afterwards and one of the explanatory variables from our main specification. Statistically significant coefficients for these terms indicate the existence of a structural break in the relationship between the dependant variable and its determinants in conjunction with the 1997 crisis.
This is measured as the product of the real interest rate and the relative price of capital (defined as the investment deflator over the GDP deflator).
Running the regression in first differences to control for the existence unit-roots confirm the above results. The demographic variable and the lagged dependant variable become insignificant. This could reflect the longer-term relationship between demographics and savings. However, the fact that both the saving rate and the working-age population have followed a general upward trend could also have given rise to a spurious relationship between these variables in the level regression.