Impact of financial liberalization on private savings rate: a panel data analysis

Abstract

This paper investigates the impact of financial liberalization on private savings rate. The study covers the data of 58 countries from 1980 to 2005. The Abiad et al (2008) database was used to measure the financial liberalization indices. Three-Stage Least Squares (3SLS) was chosen as the main estimator of this study. The finding results show that financial liberalization has both direct and indirect effect on private savings rate. The direct effect, through state ownership in the banking sector, credit controls and excessively high reserve requirements, entry barriers, prudential regulations and supervision of the banking sector, capital account restrictions, interest rate controls, reduces private savings rate while indirect effect, through entry barriers and capital account restrictions, are increasing. Besides that, the findings also show an ambiguous correlation between economic growth and the private saving rate. However, using de jure indicators to measure financial liberalization makes the study can only identify the existence and direction of the impact of financial liberalization on the private savings rate. The intensity of this impact can not yet be measured. In addition, the observed data only updated to 2005 and not focus on any special group of countries. So, it is not appropriate to recommend a particular policy based on the results of this study.