The saving collapse during the transition in Eastern Europe

Almost all of the transition economies in Eastern Europe and the former Sov iet Union experienced a severe decline in their national saving rates. The saving collapse could be explained by the elimination of involuntary saving , a feature of central planning, or by a change in equilibrium saving refle cting the new economic circumstances following the end of socialism. The pr edicted saving rates of market economies. with the same fundamentals as the transition economies before the transition are computed to test for the pr esence of involuntary saving. The results provide some support for the hypo thesis of consumption smoothing. Also considered is whether differences in the extent of liberalization affected saving rates in the cross section of transition economies. This is found to be the case: greater liberalization is association with lower saving with a one-year lag. To the extent that li beralization is associated with future growth, this finding is consistent w ith smoothing in the face of output evolving along a J-curve.