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An empirical study of the substitution of foreign for domestic savings in Brazil

Luiz Carlos Bresser-Pereira, Eliane Araújo, Paulo Gala

Revista Economia, da ANPEC, 15, 2014: 54-67, with Eliane Araujo e Paulo Gala.

This study aims to investigate the relations between the level of the real exchange rate, foreign savings and domestic savings in Brazil. The appreciation of the domestic currency caused by financing the current account deficit reduces the expected profit rate in the tradable goods industry, leading to a drop in domestic savings and the substitution of foreign for domestic savings. An econometric analysis of the Brazilian economy indicates a stable long-term relation between the exchange rate and domestic savings, and that relative devaluations of the real exchange rate positively and significantly affect domestic savings in 1994-2013. The estimations' results persist even after the period is divided into two samples, after tests showing the presence of a structural break in the model in 2002. In addition, the results of the estimations performed on the two samples confirm the presence of substitution of foreign for domestic savings.