## 6. Monetary Gaps and Net Saving Rates

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---

### Introduction
- Focus: linkages between the global and domestic monetary gaps (gap between actual real rate and “neutral” real rate) and effects on output growth, inflation, and net saving rates for 20 Asian countries, 1980–2008.
- Main argument: chained links from global monetary gap → domestic monetary gaps → saving-investment gaps; suggests global imbalances partly attributable to collective internal imbalances from macro policy choices.
- Contextual factors noted: savings glut in Asia; low policy rates / global liquidity expansion in advanced countries; foreign exchange intervention and reserve accumulation in EMD countries.

### Data and Measurement
- Sample: annual data for 20 Asian countries for 1980–2008.
- Domestic monetary gap (RGAP) definition: RGAPit ≡ gstarit + ˆγ πit − RRit, where RRit = money market rate − CPI inflation; gstar = potential real GDP growth (HP stochastic trend); ˆγ captures inverted Fisher effect estimated from constrained least squares.
- Global monetary gap (WRGAP): spread between three-month real LIBOR and average potential growth of advanced countries.
- Volatility and ranges:
  - RGAP standard deviation: EMD Asia 6.9, ADV Asia 4.2.
  - RGAP observed range across countries: −28 to 34.
  - WRGAP observed range: −3 to 3.
- Group averages and descriptive statistics (selected):
  - Output growth: on average about 2 percent higher in EMD Asia than ADV Asia.
  - CPI inflation: EMD average inflation 14.3 percent; ADV average inflation 3.5 percent (EMD about 11 percent higher).
  - Saving rates (S/Y): ADV Asia 27 percent; EMD Asia 24 percent.
  - Investment rates (I/Y): about 25 percent for both groups.
  - Net saving rates (NS/Y): ADV Asia 1.5 percent; EMD Asia −1.6 percent.
  - Net capital flows (capital and financial account/GDP): EMD Asia about 2.8 percent of GDP higher than ADV Asia.
  - International reserves (gross net of gold) relative to GDP: EMD Asia 29 percent; ADV Asia 13 percent.
  - Exchange rate growth (positive = depreciation): EMD Asia about 12 percent; ADV Asia less than 1 percent.
  - Financial integration measure (log of sum of portfolio equity and FDI stocks relative to GDP): ADV Asia average 2.9; EMD Asia average 0.2.
  - Demographics: youth dependency ~59 percent (EMD) vs 31 percent (ADV); aged dependency ~8 percent (EMD) vs 16 percent (ADV).

### Estimating Monetary Policy Inter-linkages
- Empirical approach: dynamic panel model (Arellano-Bond GMM) estimating ΔRGAPit as function of ΔWRGAPt, lagged ΔRGAP terms, and (in alternative specification) ΔUSFFR.
- Key estimated sensitivities (Table 1):
  - ADV Asia: a one-percent-point increase in WRGAP increases domestic RGAP by about 0.34 percentage point in the short run and 1.07 percentage point in the long run.
  - EMD Asia: a one-percent-point increase in WRGAP increases domestic RGAP by about 0.60 percentage point in the short run and 0.53 percentage point in the long run.
- Persistence: coefficient on ΔRGAP-1 in range 0.5–0.7, indicating substantial persistence in RGAP.
- Robustness: alternative global stance measure (USFFR) and three-month LIBOR yield similar qualitative results.
- Interpretation:
  - EMD Asia monetary gaps are about twice as sensitive in the short run to WRGAP as ADV Asia.
  - EMD Asia responses include intervention and reserve accumulation as primary reaction rather than exchange rate adjustments.
- Dispersion findings:
  - Standard deviation of RGAP closely linked to standard deviation of (RGAP − WRGAP) (R2 = 0.97).
  - Standard deviation of RGAP somewhat positively related to standard deviation of exchange rate growth (R2 = 0.45, Vietnam excluded as outlier).

### Effects on Output Growth and Inflation
- Output growth model: dynamic panel (Arellano-Bond) for ΔYG with controls including ΔRGAP, Δ(NCF/Y), ΔWYG, ΔPHI, Δ(IR/Y).
- Output growth effects (Table 2):
  - Tighter monetary policy (higher RGAP) has a significant negative impact on output growth, especially for EMD Asia.
  - EMD Asia: a one-percent-point increase in RGAP results in a decrease in output growth on average by 0.20 and 0.30 percent points in the short run and long run, respectively.
  - Net capital flows and world output growth positively affect output growth.
  - Output growth negatively associated with inflation in pooled sample and EMD Asia.
  - Δ(IR/Y) negative and significant: international reserves to GDP ratio associated with lower output growth.
- Inflation model: cross-country-augmented Phillips curve (ΔPHI dependent), controls include ΔRGAP, ΔWPHI, ΔEXG, Δ(YGAP).
- Inflation effects (Table 3):
  - Tighter monetary policy (higher RGAP) reduces inflation significantly and persistently for pooled sample and EMD Asia.
  - EMD Asia: a one-percent-point increase in RGAP results in a decrease in inflation on average by 0.91 and 0.75 percent points in the short run and long run, respectively.
  - Exchange rate depreciation pass-through:
    - EMD Asia: a one-percent-point increase in exchange rate depreciation raises inflation in the short run (long run) by 0.34 (0.45) percent point.
    - ADV Asia: corresponding short-run (long-run) impacts about 0.05 (0.08) percent point.
  - World inflation and the output gap positively associated with domestic inflation for all groups.

### Effects on Saving, Investment, and Net Saving Rates
- Estimation: ratio specifications (S/Y, I/Y, NS/Y) using IV regressions with fixed-country effects; instruments include lagged values, inflation, HP-filtered potential growth or world output growth.
- Key IV regression coefficients (Table 4, pooled and by group):
  - RGAP on Saving (pooled): 0.560***.
  - RGAP on Investment (pooled): 1.093***.
  - RGAP on Net Saving (pooled): −0.548***.
  - RGAP on Net Saving (ADV): −0.396*.
  - RGAP on Net Saving (EMD): −0.903***.
- Interpretation:
  - Tighter monetary policy (higher RGAP) increases measured saving rates modestly but increases investment rates more, so net saving rates fall (current account deteriorates) with higher RGAP overall.
  - Net saving reduction is stronger for EMD Asia (−0.903***).
  - Text highlights: a one-percent-point increase in RGAP leads to a decrease in net savings, on average, about 0.9 percent of output when current account balance equals zero for the ADV Asia (derived using Tables 2 and 4).
- Other determinants:
  - Output growth (YG) raises both saving and investment; larger effect on investment, yielding negative effect on net saving rates (stronger for EMD).
  - Reserves to output ratio (IR/Y) negatively affects investment (significant across groups) and therefore positively affects net saving rates; consistent with sterilized reserve accumulation crowding out investment.
  - Financial globalization (GLOB) stimulates saving and investment for ADV Asia but not for EMD Asia.
  - Demographics:
    - Youth dependency (YDEP) negative and significant for both saving and investment; small or insignificant effect on net saving.
    - Aged dependency (ADEP) negative effect on net saving rates across groups; for EMD Asia, ADEP positively associated with investment but negative for saving.
- Robustness checks:
  - Excluding observations with negative real rates for three consecutive years — results largely intact.
  - Including fiscal gap — RGAP coefficient z-ratio slightly reduced; fiscal gap: positive on saving, strong positive on investment, weak negative on net saving for pooled and EMD; for ADV some weak positive net saving effect.
  - Including exchange-regime dummies — statistically insignificant with fixed-country effects.

### Conclusions and Policy Implications
- Summary findings:
  - Global monetary gap propagates into domestic monetary gaps, output growth, inflation, and net saving rates.
  - EMD Asia has accommodated global monetary conditions under financial integration; global monetary expansions (negative WRGAP) increased output growth, inflation, and current account surplus (net saving rate) for EMD Asia.
  - Reserve accumulation associated with reduced domestic investment; financial integration fosters saving and investment in ADV Asia but not EMD Asia.
- Feedback loop described:
  - Global monetary expansion → higher net saving rates in Asia (current account surpluses) → reserve accumulation and uphill capital flows into global markets → low returns on U.S. government securities → feed back into global monetary conditions and domestic monetary gaps.
- Policy recommendation:
  - Global policy coordination for rebalancing should realign global and domestic monetary policies; unwinding the global monetary gap would help reduce global imbalances.

### Selected descriptive statistics (Appendix B, 1980–2008; ADV/EMD)
- RGAP; Units: %; N: 131/357; Mean: 0.72/1.00; Std: 4.21/6.88; Min: -6.44/-28.1; Max: 16.3/34.1
- GDP growth; Units: %; N: 140/420; Mean: 3.93/6.03; Std: 3.32/3.87; Min: -6.03/-13.1; Max: 13.4/24.1
- CPI inflation; Units: %; N: 140/420; Mean: 3.54/14.3; Std: 3.98/36.4; Min: -3.96/-43.6; Max: 16.2/487
- Output gap; Units: %; N: 145/435; Mean: -0.01/0.04; Std: 2.99/3.88; Min: -10.0/-14.3; Max: 6.13/16.3
- Saving rates; Units: %; N: 145/379; Mean: 27.2/23.7; Std: 10.2/10.3; Min: 8.73/-14.2; Max: 52.8/52.4
- Investment rates; Units: %; N: 145/379; Mean: 25.7/24.8; Std: 5.96/8.77; Min: 13.6/6.13; Max: 44.8/51.5
- Net saving rates; Units: %; N: 145/425; Mean: 1.49/-1.63; Std: 7.91/5.99; Min: -13.4/-21.9; Max: 25.4/21.2
- Net capital flows/GDP; Units: %; N: 145/435; Mean: 0.15/2.99; Std: 6.86/5.39; Min: -21.6/-18.3; Max: 15.6/39.7
- Exchange rate growth; Units: %; N: 140/404; Mean: 0.28/11.5; Std: 8.56/51.8; Min: -29.4/-21.6; Max: 25.6/675
- Reserves/GDP; Units: %; N: 135/415; Mean: 29.1/13.1; Std: 33.1/14.0; Min: 1.07/0.46; Max: 103/74.5
- Aged dependency; Units: %; N: 145/425; Mean: 15.7/7.59; Std: 5.22/1.86; Min: 6.91/4.96; Max: 32.9/14.5
- Youth dependency; Units: %; N: 145/425; Mean: 30.5/58.7; Std: 5.57/17.2; Min: 16.8/23.9; Max: 43.1/91.4
- GLOB (equity); Units: (log measure); N: 136/315; Mean: 2.87/0.24; Std: 1.37/2.23; Min: -4.10/-5.84; Max: 5.98/4.37
- Fiscal gap; Units: %; N: 145/423; Mean: 0.64/-3.22; Std: 4.53/3.83; Min: -8.21/-17.42; Max: 14.3/8.69

*Source: _wp10214 - 6. Monetary Gaps and Net Saving Rates.*

### References .............................................................................................................

### _wp10214 - References .............................................................................................................

### Tables
- 1. Linkages between Global and Domestic Monetary Gaps ................................................... 11
- 2. Effects of Monetary Gaps on Output Growth ..................................................................... 14
- 3. Effects of Monetary Gaps on Inflation ............................................................................... 15
- 4. Effects of Monetary Gaps on Saving, Investment, and Net Saving Rates .......................... 19

### Figures
- 1. Domestic and Global Monetary Gaps ................................................................................... 5
- 2. Output Growth ...................................................................................................................... 7
- 3. Inflation ................................................................................................................................. 7
- 4A. Saving Rates ....................................................................................................................... 8
- 4B. Investment Rates ................................................................................................................ 8
- 4C. Net Saving Rates ................................................................................................................ 9
- 5. Monetary Gap Dispersions .................................................................................................. 12

*Source: _wp10214 - References*

### 6. Monetary Gaps and Net Saving Rates ................................................................................ 1

### 6. Monetary Gaps and Net Saving Rates

### Introduction
- Focus: linkages between the global and domestic monetary gaps (gap between actual real rate and “neutral” real rate) and effects on output growth, inflation, and net saving rates for 20 Asian countries, 1980–2008.
- Main argument: chained links from global monetary gap → domestic monetary gaps → saving-investment gaps; suggests global imbalances partly attributable to collective internal imbalances from macro policy choices.
- Key contextual factors cited: savings glut in Asia; low policy rates / global liquidity expansion in advanced countries; foreign exchange intervention and reserve accumulation in EMD countries.

### Data and Measurement
- Sample: annual data for 20 Asian countries for 1980–2008.
- Domestic monetary gap (RGAP) measured as RGAPit ≡ gstarit + ˆγ πit − RRit, where RRit = money market rate − CPI inflation; gstar = potential real GDP growth (HP stochastic trend); ˆγ captures inverted Fisher effect estimated from constrained least squares.
- Global monetary gap (WRGAP): spread between three-month real LIBOR and average potential growth of advanced countries.
- Volatility and ranges:
  - RGAP standard deviation: EMD Asia 6.9, ADV Asia 4.2.
  - RGAP observed range across countries: −28 to 34.
  - WRGAP observed range: −3 to 3.
- Group averages and descriptive statistics:
  - Output growth: on average about 2 percent higher in EMD Asia than ADV Asia.
  - CPI inflation: on average about 11 percent higher in EMD Asia than ADV Asia (EMD average inflation 14.3 percent; ADV average inflation 3.5 percent).
  - Saving rates (S/Y): ADV Asia 27 percent; EMD Asia 24 percent.
  - Investment rates (I/Y): about 25 percent for both groups.
  - Net saving rates (current account ratio, NS/Y): ADV Asia 1.5 percent; EMD Asia −1.6 percent.
  - Net capital flows (capital and financial account/GDP): EMD Asia about 2.8 percent of GDP higher than ADV Asia.
  - International reserves (gross net of gold) relative to GDP: EMD Asia 29 percent; ADV Asia 13 percent.
  - Exchange rate growth (positive = depreciation): EMD Asia about 12 percent; ADV Asia less than 1 percent.
  - Financial integration measure (log of sum of portfolio equity and FDI stocks relative to GDP): ADV Asia average 2.9; EMD Asia average 0.2.
  - Demographics: youth dependency ~59 percent (EMD) vs 31 percent (ADV); aged dependency ~8 percent (EMD) vs 16 percent (ADV).

### Estimating Monetary Policy Inter-linkages
- Empirical setup: dynamic panel model (Arellano-Bond GMM) estimating ΔRGAPit as function of ΔWRGAPt, lagged ΔRGAP terms, and (in alternative specification) ΔUSFFR.
- Key dynamic estimates (Table 1, short-run and long-run sensitivities):
  - ADV Asia: a one-percent-point increase in WRGAP increases domestic RGAP by about 0.34 percentage point in the short run and 1.07 percentage point in the long run.
  - EMD Asia: a one-percent-point increase in WRGAP increases domestic RGAP by about 0.60 percentage point in the short run and 0.53 percentage point in the long run.
- Persistence: coefficient on ΔRGAP-1 in range 0.5–0.7, indicating substantial persistence in RGAP.
- Alternative global stance measure (USFFR) yields similar qualitative results; three-month LIBOR also similar.
- Interpretation:
  - Monetary gaps of EMD Asia are about twice as sensitive in the short run to global monetary gap as ADV Asia.
  - Evidence supports policy inter-linkages and accommodation of global monetary conditions by EMD Asia, with interventions (reserve accumulation) as primary response rather than exchange rate adjustments.
- Dispersion findings:
  - Standard deviation of RGAP closely linked to standard deviation of (RGAP − WRGAP) (R2 = 0.97).
  - Standard deviation of RGAP somewhat positively related to standard deviation of exchange rate growth (R2 = 0.45, Vietnam excluded as outlier).

### Effects on Output Growth and Inflation
- Output growth model: dynamic panel (Arellano-Bond), ΔYG as dependent variable; controls include ΔRGAP, Δ(NCF/Y), ΔWYG, ΔPHI, Δ(IR/Y).
- Output growth effects (Table 2):
  - Tighter monetary policy (higher RGAP) has a significant negative impact on output growth, especially for EMD Asia.
  - EMD Asia: a one-percent-point increase in RGAP results in a decrease in output growth on average by 0.20 and 0.30 percent points in the short run and long run, respectively.
  - Net capital flows and world output growth positively affect output growth.
  - Output growth negatively associated with inflation in pooled sample and EMD Asia.
  - Δ(IR/Y) negative and significant: international reserves to GDP ratio associated with lower output growth.
- Inflation model: cross-country-augmented Phillips curve (ΔPHI dependent), controls include ΔRGAP, ΔWPHI, ΔEXG, Δ(YGAP).
- Inflation effects (Table 3):
  - Tighter monetary policy (higher RGAP) reduces inflation significantly and persistently for pooled sample and EMD Asia.
  - EMD Asia: a one-percent-point increase in RGAP results in a decrease in inflation on average by 0.91 and 0.75 percent points in the short run and long run, respectively.
  - Exchange rate depreciation pass-through:
    - EMD Asia: a one-percent-point increase in exchange rate depreciation raises inflation in the short run (long run) by 0.34 (0.45) percent point.
    - ADV Asia: corresponding short-run (long-run) impacts about 0.05 (0.08) percent point.
  - World inflation and the output gap positively associated with domestic inflation for all groups.

### Effects on Saving, Investment, and Net Saving Rates
- Equations: ratio specifications (S/Y, I/Y, NS/Y) with IV regressions and fixed-country effects to account for endogeneity (instruments: lagged values, inflation, HP-filtered potential growth or world output growth).
- Key IV regression results (Table 4):
  - RGAP coefficients:
    - On Saving (pooled): 0.560***.
    - On Investment (pooled): 1.093***.
    - On Net Saving (pooled): −0.548***.
    - On Net Saving (ADV): −0.396*.
    - On Net Saving (EMD): −0.903***.
  - Interpretation: tighter monetary policy (higher RGAP) increases measured saving rates modestly but increases investment rates more, so net saving rates fall (current account deteriorates) with higher RGAP overall; the net saving reduction stronger for EMD Asia (−0.903***).
  - Quantitative implication highlighted in text: a one-percent-point increase in RGAP leads to a decrease in net savings, on average, about 0.9 percent of output when current account balance equals zero for the ADV Asia (derived using Tables 2 and 4).
- Other determinants:
  - Output growth (YG) raises both saving and investment; larger effect on investment, yielding negative effect on net saving rates (stronger for EMD).
  - Reserves to output ratio (IR/Y) negatively affects investment (significant across groups) and therefore positively affects net saving rates; evidence consistent with sterilized reserve accumulation crowding out investment.
  - Financial globalization (GLOB) stimulates saving and investment for ADV Asia but not for EMD Asia.
  - Demographics:
    - Youth dependency (YDEP) negative and significant for both saving and investment; small or insignificant effect on net saving.
    - Aged dependency (ADEP) negative effect on net saving rates across groups; for EMD Asia, ADEP positively associated with investment (possible capital-for-labor substitution), but negative for saving.
- Robustness checks reported:
  - Excluding observations with negative real rates for three consecutive years (proxy for financial repression) — results largely intact.
  - Including fiscal gap (government saving-investment gap) — RGAP coefficient z-ratio slightly reduced; fiscal gap effects described (positive on saving, strong positive on investment, weak negative on net saving for pooled and EMD; for ADV some weak positive net saving effect).
  - Including exchange-regime dummies — statistically insignificant with fixed-country effects.

### Conclusions and Policy Implications
- Summary findings:
  - International transmission of monetary policy: global monetary gap propagates into domestic monetary gaps, output growth, inflation, and net saving rates.
  - EMD Asia has accommodated global monetary conditions under financial integration; global monetary expansions (negative WRGAP) increased output growth, inflation, and current account surplus (net saving rate) for EMD Asia.
  - Reserve accumulation associated with reduced domestic investment; financial integration fosters saving and investment in ADV Asia but not EMD Asia.
- Feedback loop described:
  - Global monetary expansion → higher net saving rates in Asia (current account surpluses) → reserve accumulation and uphill capital flows into global markets → low returns on U.S. government securities → feed back into global monetary conditions and domestic monetary gaps.
- Policy recommendation:
  - Global policy coordination for rebalancing should realign global and domestic monetary policies; unwinding the global monetary gap would help reduce global imbalances.

*Source: _wp10214 - 6. Monetary Gaps and Net Saving Rates.*

### References

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### Appendix A: Country Group List
- Asian 20 countries are split into two country groups.
- The emerging market and developing (EMD) Asia group (15) comprises Bangladesh, Cambodia, China, India, Indonesia, Korea, Laos, Malaysia, Myanmar, Pakistan, Philippines, Sri Lanka, Taiwan, Thailand, and Vietnam.
- The advanced (ADV) Asia group (5) comprises Australia, Hong Kong SAR, Japan, New Zealand, and Singapore.
- Note: Our advanced country group includes Hong Kong SAR and Singapore because their per capita incomes have been well above the sample mean of the advanced countries for at least the last 10 years.

### Appendix B: Descriptive Statistics of Key Variables (1980–2008; ADV/EMD)
- Variable: RGAP; Units: %; N: 131/357; Mean: 0.72/1.00; Std: 4.21/6.88; Min: -6.44/-28.1; Max: 16.3/34.1
- Variable: GDP growth; Units: %; N: 140/420; Mean: 3.93/6.03; Std: 3.32/3.87; Min: -6.03/-13.1; Max: 13.4/24.1
- Variable: CPI inflation; Units: %; N: 140/420; Mean: 3.54/14.3; Std: 3.98/36.4; Min: -3.96/-43.6; Max: 16.2/487
- Variable: Output gap; Units: %; N: 145/435; Mean: -0.01/0.04; Std: 2.99/3.88; Min: -10.0/-14.3; Max: 6.13/16.3
- Variable: Saving rates; Units: %; N: 145/379; Mean: 27.2/23.7; Std: 10.2/10.3; Min: 8.73/-14.2; Max: 52.8/52.4
- Variable: Investment rates; Units: %; N: 145/379; Mean: 25.7/24.8; Std: 5.96/8.77; Min: 13.6/6.13; Max: 44.8/51.5
- Variable: Net saving rates; Units: %; N: 145/425; Mean: 1.49/-1.63; Std: 7.91/5.99; Min: -13.4/-21.9; Max: 25.4/21.2
- Variable: Net capital flows/GDP; Units: %; N: 145/435; Mean: 0.15/2.99; Std: 6.86/5.39; Min: -21.6/-18.3; Max: 15.6/39.7
- Variable: Exchange rate growth; Units: %; N: 140/404; Mean: 0.28/11.5; Std: 8.56/51.8; Min: -29.4/-21.6; Max: 25.6/675
- Variable: Reserves/GDP; Units: %; N: 135/415; Mean: 29.1/13.1; Std: 33.1/14.0; Min: 1.07/0.46; Max: 103/74.5
- Variable: Aged dependency; Units: %; N: 145/425; Mean: 15.7/7.59; Std: 5.22/1.86; Min: 6.91/4.96; Max: 32.9/14.5
- Variable: Youth dependency; Units: %; N: 145/425; Mean: 30.5/58.7; Std: 5.57/17.2; Min: 16.8/23.9; Max: 43.1/91.4
- Variable: GLOB (equity); Units: (log measure); N: 136/315; Mean: 2.87/0.24; Std: 1.37/2.23; Min: -4.10/-5.84; Max: 5.98/4.37
- Variable: Fiscal gap; Units: %; N: 145/423; Mean: 0.64/-3.22; Std: 4.53/3.83; Min: -8.21/-17.42; Max: 14.3/8.69

Notes:
- This table shows descriptive statistics of key variables for 1980–2008 for the two country groups (ADV/EMD) in Appendix A. Columns 3–7 show statistics for ADV/EMD in parallel.
- Reserves are defined as gross reserves net of gold in U.S. dollars (USD).
- The output gap is measured by 100×log(real GDP/potential GDP), where the potential GDP is the HP stochastic trend of real GDP.
- Investment rates are measured by the percentage ratio of total (real) investment to (real) GDP.
- Net saving rates are defined as the percentage ratio of the current account balance to GDP.
- Saving rates are measured by the sum of investment and net savings rates.
- A positive (negative) exchange rate growth means a depreciation (appreciation) of a country’s currency vis-à-vis U.S. dollars (average of period data).
- The aged dependency ratio is the percentage ratio of 65-and-above population to total population; and the youth dependency ratio is the percentage ratio of under-15 population to total population.
- GLOB (equity) is the logarithm of the two-year average of the percentage ratio of the sum of the portfolio equity assets & liabilities and the stock of foreign direct investment assets & liabilities to GDP.
- The fiscal gap is measured by the percentage ratio of the government sector saving-investment gap to GDP.

*References and appendices as provided in the source PDF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10214.pdf_