Saving, Growth and Liquidity Constrains by Jappelli and Pagano

Paulina Armacińska

Ertem Ejder

Schedule:

1. Overrlapping-generations model

2. Indicators of liquidity constraints

3. Explanation of international differences in saving rates

4. Relation between liquidity constraint and growth rate

5. Implications for current policy issues

Overrlapping-generations model

• Liquidity constrain:– Young can borrow at most fraction of of their Φ

discounted lifetime income

income

I period II period III period

loan savings

Overrlapping-generations model

• Aggregate production function• Exogenous growth

– Technological progress as a increasing funcion of time– Growth does not depend on the availability of credit to

households– Liquidity constrains rise aggregate savings– Stronger effect of growth on savings in economy with

liquidity constraints– Savings do not affect growth

Overrlapping-generations model

• Endogenous growth– Technology is a function of aggregated capital

(technology displays IRS)– An economy with liquidity constraints grow

faster

• Effects on welfare– Forcing consumption of the young to be lower– Raising their pernament income by fostering

capital accumulation

Indicators of liquidity constraints

• Regulations• The cost of enforcing loan contracts• The information on borrower’s

credithworthiness available to lender

Savings and liquidity constraints

• Panel of 19 OECD countires• Averages of annual data for periods 1960-

70, 1971-80 and 1981-90

Savings and liquidity constraints

• Dependent variable: net national savings divided by net national product

• benchmark regressors: GDP growth rate, ratio of inflation-adjusted government saving to net national product, dependency ratio

• New regressors: maximum LTV ratio, country and time dummies

Savings and liquidity constraints

• Main Conclusions:– Positive relation between growth and savings– An increase in the LTV ratio reduces the

national saving rate– The effect of growth on savings depend on the

severity of liqudity constraint

Growth and liquidity constraints

• Checking whether liquidity constrain has some explanatory power in reduced form of equation of growth

• Two data sets: – by De Long and summers (1991) – by Barro and Wolf (1989)

• Regression of productivity growth in 1960-1985 on:– the labor force growth– the share of equipment and non-equipment investment – the labor productivity gap relative to the US– the LTV ratio

Growth and liquidity constraints

• Main conclusions:– Countries with lowet initial productivity relative to US

exhibit faster growth is subsequent periods– Liquidity constrain promotes growth – Determinants of growth:

• Initial level of per capita GDP• Secondary school enrolment• LTV ratio

– Financial repression in the market for bussines loan reduces productive investment and growth

Conclusions:

• Liquidity constraints on households:– Raise the saving rate– Strengthen the effect of growth on saving– Foster productivity growth in models in which growth

is endogenous

• Financial liberalisation and integration may lead to:– easing of liquidity constrains– deterioration in the overall savings and growth

performance– reduction of welfare of current and future generations

Thank You!