Financial Development, Saving Rates, and International Economic Volatility: A Simple Model

Hejie Zhang, Huiming Lv and Shenghau Lin
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Hejie Zhang: School of Economics and Management, Zhejiang Sci-Tech University, Hangzhou 310018, China
Huiming Lv: Business School, Ningbo University, Ningbo 315211, China
Shenghau Lin: Department of Public Administration, Law School, Ningbo University, Ningbo 315211, China

Mathematics, 2021, vol. 9, issue 16, 1-20

Abstract: This study constructs a dynamic and open economy model to show that low saving rates are the cause of economic volatility in developed countries, whereas inadequate financial development is identified as the reason for economic volatility in emerging countries. With low saving rates or inadequate financial development, countries find it difficult to avoid economic volatility, because it is difficult to alleviate the financing constraints of firms and maintain the stability of investment. Under similar conditions, economic volatility is more severe in developed countries and has spillover effects by triggering interest rate fluctuations in the global capital market and intensifying economic volatility in other countries. By contrast, emerging countries or small economies do not have spillover effects. To avoid dramatic international economic volatility, emerging countries should prompt financial development, and developed countries should increase their saving rates.

Keywords: financial development; saving rates; economic volatility (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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