Foreign Debt and Domestic Savings in Developing Countries

Luke Okafor and Joanna Tyrowicz ()
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Luke Okafor: Faculty of Economic Sciences, University of Warsaw (alumnus)

No 2008-06, Working Papers from Faculty of Economic Sciences, University of Warsaw

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.

Keywords: Africa; foreign debt; domestic savings; Latin America; MIU (search for similar items in EconPapers)
JEL-codes: O11 O42 O16 E61 E21 (search for similar items in EconPapers)
Date: 2008-09
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Published in Latin American Business Review 9.3/4 (2008): pp. 189-226

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http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP6.pdf First version, 2008 (application/pdf)

Related works:
Working Paper: Foreign Debt and Domestic Savings In Developing Countries (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:war:wpaper:2008-06

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