Savings and growth across countries

Thesis (Ph. D.)--University of Rochester. Dept. of Economics, 2011.This work investigates links between volatility, savings, and growth across countries. I find that differences in terms of trade volatility account for over 25% of the cross-country variation in growth among developing countries from 1980 to 2007. The magnitude is arresting: a two-standard-deviation difference in exposure to terms of trade volatility between two countries is associated in the data with a 32-percentage-point difference in overall output growth. Two models, one focusing on differential rates of capital accumulation and the other on the risks associated with technology adoption, explain about half the difference in the data. In both models, the only difference among countries is the respective severity of terms of trade volatility. A third model takes the generally higher volatility in the developing world as given, and investigates the response of the United States to the precautionary savings of the rest of the world. I find that U.S. savings will fall in response to higher savings abroad, even when the endogenous impact on interest rates is taken into account. Taken together, these models describe a world in which the United States saves little and instead borrows the excess savings of developing countries, developing countries save precautionarily in proportion to the terms of trade risk they face, and low-risk countries outpace high-risk countries in technology. All of these features, I show empirically, were indeed present in the world of the late 1900’s and early 2000’s