Private saving in Mexico, 1980-90

Between 1987 and 1990, Mexico's current account and trade balance deteriorated by more than US$10 billion. Higher investment accounts only partly for this deterioration; nor can it be attributed to the public sector. By conventional (unadjusted) measures of private saving - the total investment not financed by public or foreign savings - private saving did decline sharply between 1987 and 1990. But that diagnosis does not hold true when private, public, and foreign savings are corrected (as they are here) to account for shifts in portfolio composition from foreign to domestic assets, for the effects of inflation on foreign and domestic interest income (the inflation tax), for fluctuations in the real exchange rate, and for other factors. Arrau and Oks provide information about the components of private saving by asking questions such as these: Is consumption more important than disposable income in explaining changes in private saving? What components of consumption and disposable income matter most? The following are among the conclusions: When conventional measures of private saving are corrected, the recent decline in private saving appears less important than it did before. Most variations in private saving between 1980 and 1990 are ascribable to fluctuations in disposable income. The sharp drop in private saving in 1990 was prompted primarily by a decline in disposable income and, less so, by fast-growing consumption.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Economics,International Terrorism&Counterterrorism

Commodity stabilization funds

Commodity stabilization funds are hard-currency savings to protect against a fall in income for commodity exports in the presence of borrowing constraints. The authors develop the optimal rules for deposits in and withdrawals from such a fund by using a benchmark model of precautionary savings with liquidity constraints. They show that the optimal stabilization fund is small. For the Chilean Copper Stabilization fund, they show that the actual accumulation of foreign assets has been much larger than the benchmark model requires. Over long periods, the copper fund should contain less than one month's exports. They also use the model to find the optimal depletion of the windfall gain oil exports received as a result of the Persian Gulf crisis - amounting to about four months of average exports. They find that such a windfall gain should be depleted in about four years. In the long run, an oil exporter should keep a small fund, significantly less than one month of oilexports. But higher-than-predicted funds can be justified if there are externalities associated with the fund, frictions in the economy, or the borrowing constraint is relaxed.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Inequality,Fiscal&Monetary Policy

Financial innovation and money demand : theory and empirical implementation

Empirically, traditional money demand equations are frequently characterized by periods of"missing money", unstable parameters, and autocorrelated errors. The common practice to solve these problems consists of changing the specification of the regressions once the shifts (which are usually associated to financial innovation) are identified. This paper provides an alternative approach to dealing with the unobservable process of financial innovation. It consists of modelling financial innovation as shocks that have permanent effects on the money demand, analogous to productivity shocks in production functions. This paper describes the theoretical model used and shows the failure of traditional money demand equations using cointegration techiques. It describes a simple GLS-iterative econometric model which allows the authors to recover the path of financial innnovation and obtain sensible estimates of the relevant elasticities. It also shows Monte Carlo simulations to evaluate the behavior of the estimation procedure for particular samples and data generating processes, and to study how robust the procedure to some deviations from the basic assumptions is.Economic Theory&Research,Environmental Economics&Policies,Fiscal&Monetary Policy,Inequality,Financial Intermediation

Intertemporal substitution, risk aversion, and private savings in Mexico

The decline in private savings since 1982 is arguably the most important problem in high debt countries. A reversal of the trend is essential if growth is to be restored. Three factors predominate : 1) the extent of intertemporal substitution; 2) attitudes toward risk; and 3) private/public savings interaction. These factors lie at the core of the authors'research. They test the issue of debt neutrality - whether future taxes are recognized as an offset for the value of any government debt held - and the response of private savings to real interest rates and uncertainty. The authors estimated two configurations of a joint portfolio-choice/savings model. First, they included equity, domestic bonds, and flight capital. In the second configuration they eliminated flight capital. The authors conclusions include the following : i) the intertemporal approach to consumption is supported by the data; ii) the results imply rejection of the traditional, expected utility approach; iii) risk aversion is significant but lower than many have argued from analysis of static versions of the capital asset pricing model; iv) results on the intertemporal substitution elasticity are much weaker; and v) domestic government bonds probably are considered as part of private wealth, although significantly less than one for one, thus rejecting debt neutrality.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation,Inequality

Pensions systems and reform : country experiences and research issues

Pension reform is spreading around the globe, from Latin America to the OECD countries, and major reform projects are being discussed in many other developing, transition, and OECD countries. The authors survey current research issues and country experiences related to old-age social security arrangements by introducing the papers selected for a special June 1994 issue of the Revista de Analisis Economico and presented at the July 1994 Conference on Pension Systems and Reforms sponsored by Fundacao Getulio Vargas. They also present 15 research and policy design issues not addressed by the literature, including macroeconomic effects, conditions of political economy, government's role in easing or reducing old-age poverty, and design features of fully funded pension systems.Payment Systems&Infrastructure,Pensions&Retirement Systems,Banks&Banking Reform,Environmental Economics&Policies,Labor Policies,Environmental Economics&Policies,Banks&Banking Reform,Economic Stabilization,Economic Theory&Research,Pensions&Retirement Systems

Human capital and endogenous growth in a large scale life cycle model

Most models of economic growth are infinite horizon models that neglect the role of human capital in shaping life-cycle variables. This paper introduces training decisions in a life-cycle model to study the role of human capital both in life-cycle behavior and as an engine of growth. The crucial assumption about growth of this model is that new generations are endowed with the average level of skills available when they were born. The paper studies the impact of demographics and taxation on the endogenous rate of growth. Population growth affects the age distribution of the population and the equilibrium spillover that sustains growth. Unlike what happens with infinite horizon models, this model shows per capita income growth and population growth to be inversely related. Also, different from fertility-based models, this model shows the direction of causality to go from exogenous population growth to endogenous growth. To forgo consumption, households hold human and physical capital. Tax policy can affect the proportion of these assets in household portfolios. Tax policy that favors human capital (as opposed to physical capital) translates into higher per capita growth in income.Economic Theory&Research,Economic Growth,Environmental Economics&Policies,Achieving Shared Growth,Inequality

El ahorro privado en México, 1980-1990

Entre 1987 y 1990 la balanza comercial y de la cuenta corriente de México se deterioró en más de 10 000 millones de dólares. El grado en que este deterioro debe preocuparnos se basa, por supuesto, en los factores subyacentes. Si ocurrió por un alza en la inversión no debe ser causa de consternación, pues el deterioro comercial podría considerarse entonces como algo temporal. Los indicios muestran, de hecho, que a pesar de las serias reducciones en la inversión pública, se ha dado un crecimiento considerable en la inversión fija en los últimos tres años, en particular en 1990, cuando la inversión fija creció 13.5% en términos reales en comparación con su nivel de 1989, o 28% por encima de su nivel de 1987. No obstante, la mayor inversión sólo explica en parte el reciente deterioro de la cuenta corriente. Este deterioro no se puede imputar al sector público; el ahorro público se elevó en un grado mayor que el incremento en la inversión privada, lo que implica que la totalidad del deterioro de la cuenta corriente podría atribuirse a la baja en el ahorro privado. La medida convencional del ahorro privado cayó de hecho de manera notable entre 1987 y 1990. Sin embargo, cuando se miden adecuadamente el ahorro privado, público y extranjero, este diagnóstico ya no sigue siendo válido.

The demand for money in developing countries: Assessing the role of financial innovation

Traditional specifications of money demand have been commonly plagued by persistent overprediction, implausible parameter estimates, and highly autocorrelated errors. This paper argues that some of those problems stem from the failure to account for the impact of financial innovation. We estimate money demand for ten developing countries employing various proxies for the innovation process and provide an assessment of the relative importance of this variable. We find that financial innovation plays an important role in determining money demand and its fluctuations, and that the importance of this role increases with the rate of inflation.money demand inflation currency substitution dollarization financial innovation

The demand for money in developing countries : assessing the role of financial innovation

Traditional specifications of money demand have commonly been plagued by persistent overprediction, implausible parameter estimates, andhighly autocorrelated errors. The authors argue that some of these problems stem from the failure to account for the impact of financial innovation. They estimate money demand for ten developing countries, using various proxies for financial innovations. They also assess the relative importance of this variable, finding financial innovation can be better modeled as a stochastic (random-walk) trend rather than a deterministic (time) trend. Financial innovation plays an important role in determining fluctuations of the demand for money. The importance of this role increases with the rate of inflation.Economic Theory&Research,Environmental Economics&Policies,Fiscal&Monetary Policy,Inequality,Energy and Environment

Tamaño de los Fondos de Pensiones en Chile y su Desempeño Financiero

Walker (1993a, 1993b) conclude that there is a systematic relationship between returns and the size of Chilean Pension Funds. This association is ussually motivated by institutional and regulatory aspects. This paper introduces a theoretical model to motiSize, returns, pension funds, panel data models, portfolio choice