Foreign Debt and Domestic Savings In Developing Countries

Luke, Okafor and Joanna, Tyrowicz (2008): Foreign Debt and Domestic Savings In Developing Countries. Published in: Latin American Business Review , Vol. 3/4, No. 9 (2008): pp. 189-226.

Abstract

This paper approaches the question of potential causality between foreign debt and domestic savings in the context of developing countries. Literature provides evidence in as far as foreign debt and development is concerned, but little attention was given so far to internal potential for capital formation. We provide a theoretical framework and test its relevance using 1975-2004 data for two groups of countries: sub-Saharan Africa and Latin America with the Caribbean. With the use of instrumental variables we find negative impact of foreign debt on domestic savings especially in the long run. The results are not susceptible to the choice of countries or outliers. However, the relationship between foreign debt and savings seems to depend on debt accumulation gaining significance only after passing a country specific threshold.

• Item Type: MPRA Paper
• Language: English
• Keywords: Africa, foreign debt, domestic savings, Latin America, MIU
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

References

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Afexntiou, P. C., and Serletis, A. (1996). ‘‘Foreign Indebtedness in Low and Middle Income Developing Countries,’’ Social and Economic Studies, Vol. 45, No. 1.

Aizenman, J. P., and Radziwill, A. (2004). ‘‘Sources for Financing Domestic Capital: Is Foreign Saving a Viable Option for Developing Countries?’’ NBER Working Paper, W 10624.