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Assessing the link between financial liberalisation and saving

Author: Alexander E Kentikelenis
Institution: Liverpool John Moores University
Type of case study: Research

About the research

In 1973, McKinnon and Shaw made the case against financial repression and spurred a worldwide debate with important policy implications. Repressed economies were seen to suffer from a variety of problems that could be amended by liberalising the system and resorting to the market – instead of the government – to perform the most efficient allocation of resources. One of the main hypotheses in their work was that financial liberalisation would allow the market to determine interest rates, which would in turn stimulate saving and investments, thus giving rise to a virtuous cycle of saving and growth.

This study focuses on the effects of financial deregulation on gross national and household savings via its impact on interest rates. In this context, the experiences of the UK and Korea after 1973 were explored.

In these case studies, no clear link between financial liberalisation and savings was established. In some cases there were correlations between a rise in interest rates and a similar rise in savings, but these were only limited to specific time periods. A liberalised system also allows the financial system to have a more cyclical effect on interest rates. The only relationship that appears clear is that deregulation has an adverse effect on household saving at least in the short term.

Methodology

The study explores the link between financial liberalisation and savings. In doing this, different variables that have explanatory significance vis-a-vis savings and interest rates are examined. With the help of statistics from the IMF, World Bank and OECD databases, it is shown that the effects of deregulation were not originally predicted by theory:

  • The link between financial liberalisation and savings is at best unclear: too many other variables intercept that hinder definite conclusions.
  • Financial liberalisation actually increases household access to credit, which in turn has a negative effect on personal savings; but this need not necessarily affect gross national savings.
  • The debate on the optimal pace of liberalisation is useful, but it still needs to be acknowledged that liberalisation should not be treated uncritically and as a ‘one-size-fits-all’ solution for neither developed nor developing countries.

Findings for policy

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