Terms of trade shocks and private savings in the developing countries

- Developing countries suffer from terms of trade shocks.
- These shocks affect the savings rate in the country.
- Transitory component of terms of trade shocks have a greater impact on savings than the permanent component.
- Most of the determinants of savings identified in the literature also applies to the developing countries.

Economic agents in the developing countries are subject to tight credit constraints, which are more pronounced during bad state of nature. Thus, adverse shocks to commodity prices in the world market can force them to reduce savings by a larger amount than they would otherwise have. Empirical analysis using a dynamic GMM model and data from 45 developing countries confirm that most of the determinants of savings identified in the literature also apply to the developing countries. The transitory component in the terms of trade have a larger positive impact than the permanent component. This reflects the lack of access to foreign borrowing. Although the impact of terms of trade shocks is found to be asymmetric, the magnitude of the impact appears to be relatively small. Results show some differences in the response of savings in the three regions considered here. The results are, however, robust for alternative estimators and determinants.