International Markets and Domestic Savings

  • E. V. K. FitzGerald
Part of the International Finance and Development Series book series (IFD)


In the Ricardian tradition, savings out of profits provide a constraint on investment because the saving decision and the investment decision are the same, so that ceteris paribus, growth is constrained by the rate of profit. Drawing from the strict neoclassical tradition, capital markets are orderly and well-behaved, clearing the supply and demand for funds in national and international markets through the interest rate. Consequently, the failure of capital markets to clear is traced back to savings constraints that arise due to structural budget deficits and demographic trends, and drive up world interest rates. This interpretation has led the current academic, policymaking, and global market orthodoxy as embodied in the International Monetary Fund (IMF) to assert that a global ‘savings shortage’ lies at the heart of international macroeconomic instability:

The critical importance of saving for the maintenance of strong and sustainable growth in the world economy, for external adjustment, and for the amelioration of the international debt problem is well recognized. Consequently, the declining trend in the saving rates of many countries, industrial as well as developing, has been a major source of concern. This decline has been associated with lower rates of capital accumulation and growth in the world economy.


Interest Rate Monetary Policy Capital Market Real Interest Rate Saving Rate 
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Copyright information

© Institute of Social Studies 2003

Authors and Affiliations

  • E. V. K. FitzGerald
    • 1
    • 2
  1. 1.Finance and Trade Policy Research CentreUniversity of OxfordUK
  2. 2.Institute of Social StudiesThe HagueNetherlands

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