Saving behaviour under terms-of-trade uncertainty: evidence from hidden cointegration approach

Manuchehr Irandoust

Macroeconomics and Finance in Emerging Market Economies, 2017, vol. 10, issue 2, 135-150

Abstract: There are very few studies on the asymmetric relationship between private saving (PS) and terms-of-trade uncertainty. This paper examines the extent to which terms-of-trade shocks have an asymmetric effect on PSs in 18 Latin American countries (LACs) over the period 1970–2012. By using the recently developed hidden cointegration analysis within a likelihood-based panel framework and panel-error–correction technique, the results indicate that there exists a long-run relationship between PS and terms-of-trade volatility. It has found some support for the view that the PS ratios have responded asymmetrically to the terms-of-trade variability as an indicator of risk and income uncertainty. The findings of this study confirm that behavioural factors, particularly loss aversion as developed through prospect theory, influence PS patterns.

Date: 2017
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DOI: 10.1080/17520843.2016.1223729

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