Varieties%20of%20Saving%20and%20Crises

Technical Notes

Varieties of Saving and Crises


CODE: IDB-TN-1047
AUTHOR(s): Cavallo, Eduardo A. , Fernández-Arias, Eduardo , Marzani, Matias
PUBLISHED: June 2016
LANGUAGE: English
RELATED TOPICS: Macroeconomics
DOWNLOAD FILE IN: English

Abstract:

This paper shows, using probit analysis, that low national savings increase the risk of macroeconomic crisis. Foreign savings are a poor substitute of national savings not only for domestic investment (Feldstein-Horioka result), but also for stability. It is found that deeper financial integration does not cure low investment and can improve the situation only to the extent that the risks of the foreign saving portfolio can be kept under control. Overall, a fundamental conclusion is that strong national savings are key for robust growth. Extending the probit analysis, the paper shows that the composition of foreign assets and liabilities matters substantially for portfolio risk and derives an index to assess the associated country risk.

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