Varieties of Saving and Crises

Abstract

work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.http://www.iadb.org 20161 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.JEL classifications: E21, E22, E44, F32, F34, G01, G15, H63

Saving for Development: How Latin America and the Caribbean Can Save More and Better

“…This argument suggests that in an economy, saving increases endogenously when better investment opportunities exist. However, even if such a favorable environment Fernández-Arias, and Marzani (2016).…”

“…In other words, is national saving better in terms of associated macroeconomic risks? Cavallo, Fernández-Arias, and Marzani (2016) expanded Catão and Milesi-Ferretti's statistical analysis to include the so-called self-financed capital stock (i.e., the sum of accumulated national saving, appropriately depreciated over time) as an additional explanatory variable for external crises in the regressions. The self-financed capital stock provides a stock measure of the portion of domestic investment that is covered by national saving; it is the domestic capital stock for which financing did not rely on foreign saving.…”

“…To analyze the implications of gross positions for the risk of external crises, the effect of foreign liabilities and assets were examined separately using the same empirical model as in the preceding section (see Cavallo, Fernández-Arias, and Marzani, 2016). The net foreign liabilities were replaced by the gross components (i.e., total foreign liabilities and total foreign assets respectively, both as ratios of GDP) in the regressions; 21 the other explanatory variables (including the self-financed capital stock) were left unchanged.…”

“…On the foreign assets side, reserve assets have increased significantly among both large and small countries in the region while portfolio and direct equity investment assets have also risen considerably among the larger countries. Cavallo, Fernández-Arias, and Marzani (2016) use the model described earlier to obtain a risk profile of foreign savings that depends on the portfolio composition of foreign assets and liabilities in a country's balance sheet. Their External Portfolio vulnerability Index (EPvI) sums up how each country's portfolio item contributes to the risk of an external crisis and is normalized such that values higher than 1 indicate that the external portfolio is a risk factor (it increases the probability of an external crisis) and values lower than 1 mean that the portfolio is a risk mitigating factor (it reduces the probability of an external crisis).…”

“…To calculate the possible impact of increased financial integration on domestic investment, Cavallo, Fernández-Arias, and Marzani (2016) extend the basic Feldstein and Horioka (1980) framework relating domestic investment to national saving to also include how this relationship is affected by financial integration. 29 They find that financial integration appears to benefit investment the most when national saving is weak.…”