Does financial reform raise or reduce saving?

The effect of financial liberalization on private saving is theoretically a mbiguous, not only because the link between interest rate levels and saving is itself ambiguous, but also because financial liberalization is a multid imensional and phased process, sometimes involving reversals. Using princip al components, we construct 25-year time-series indices of financial libera lization for each of eight developing countries: Chile, Ghana, Indonesia, K orea, Malaysia, Mexico, Turkey, and Zimbabwe. These are employed in an econ ometric analysis of private saving in these countries. Our results cannot o ffer support for the hypothesis that financial liberalization will increase saving. On the contrary, the indications are that liberalization overall-a nd in particular those elements that relax liquidity constraints-may be ass ociated with a fall in saving.