The effects of financial liberalization on savings and investment in Uruguay.

Deals with an empirical test of the Shaw-McKinnon hypothesis about the effects of financial liberalization on savings and investment. Three basic characteristics of the Uruguayan experience are first noted: the financial sector rapidly expanded, the private domestic savings rate did not increase; and foreign savings rushed into the country to finance an investment boom. Their empirical results are mixed. Although, as expected, financial savings increased substantially in the period of financial liberalization, private domestic savings did not seem to be responsive to changes in the rate of interest. Instead, foreign savings played a significant role. They also note that real exchange rate appreciation after 1978 tended to offset the benefits of deregulation. Investment behaviour also was not strongly correlated with financial liberalization. Also analyzes some apparent microeconomic consequences of the financial reform in Uruguay. -from Editors