The impact of terms of trade and macroeconomic regimes on private saving

- We study the impact of terms of trade and macroeconomic regimes on private saving.
- Higher terms of trade raise saving, and this effect is larger for temporary shocks.
- Accelerations and volatility of terms of trade also raise private saving.
- When credit is less constrained, the effect of higher terms of trade is diminished.
- Inflation targeting reduces private saving, by lowering precautionary saving.

In this paper we present novel findings on private saving behavior. Relying on the largest available world database, we find that higher terms of trade (TOT) raise saving, and this effect is much larger for temporary TOT shocks. When credit constraints are less binding, the marginal effect of higher TOT on private saving is lessened. Accelerations in TOT growth and larger TOT volatility raise private saving. While adopting fiscal rules and floating exchange rate regimes yields no effect on private saving, introducing an inflation targeting regime reduces private saving, possibly by lessening the need for precautionary saving.