Savings and the Debt Cycle: The Ambiguous Role of Institutions

Savings are an import prerequisite of investment and long term growth in a country and the ability of a country to enter a 'beneficial debt cycle'. The paper analyzes how savings respond to the institutional quality in developing and transition economies. For a panel of about 60 countries over a time span of 25 years, we show that institutions play an ambiguous role. Whereas international market integration exhibits no significant influence, good governance and property rights lead to higher aggregate savings. In contrast, we find that a smaller government is associated with lower savings to income ratios. These findings are robust with respect to a number of changes in explanatory variables, estimation and treatment of instruments.