Capital flows and saving in Latin America and Asia: A reinterpretation

Both theory and the empirical evidence for a broad range of countries have identified a negative relationship between domestic and foreign saving. Still, based on the experience of the 1990s, a popular view has emerged that domestic and foreign saving are positively related in Asia and negatively related in Latin America. We argue that this popular discussion does not discriminate between trends in domestic saving (which are very different in the two regions) and the cyclical component of saving, which is linked to capital flows. We show that, when trend and cyclical components of domestic saving and capital flows are properly taken into account, the two regions do not differ in the short-run response of domestic saving to capital inflows. We conclude that the main differences pertain to the long-run behavior of saving rates, which are driven by trends in demographic factors, per capita GDP, and other factors that have little to do with fluctuations in capital flows.