In a recent paper Montiel and S

In a recent paper, Montiel and Sérven (2008) point out the increasing number of advocates of the notion that the level of the real exchange rate has important effects on growth because it affects capital accumulation. For Bresser-Pereira and Gala (2007) there usually exists a high rate of substitution of foreign for domestic savings as a result of the currency appreciation associated with current account deficits and capital inflows. The ordinary wisdom view that it is “mismatches” (or temporary exchange rate deviations from its equilibrium level) that affect growth because the distort a crucial relative price in the economy does not, therefore, appear to be a good explanation for the low growth associated with the foreign savings and indebtedness policy many countries embrace. It makes more sense to explain it by means of the appreciation of the exchange rate that this policy causes, which, on the one hand (income) causes an increase in real wages and, given a high marginal propensity to consume, causes increased consumption, thereby reducing domestic savings as foreign savings increase; and, on the other hand (demand) causes business firms to lose competitiveness, reduce their expected profits and, as investment falls, so do domestic savings, which are displaced by foreign savings. In Brazil, some authors like Pastore (2009, 2010) argue that the Brazilian total savings rate can be and is being increased by resorting to foreign savings. According to this thesis, the CEP-37440 of foreign savings complements domestic ones, increasing the economy\'s total savings, and it is improper to perceive a substitution of foreign for domestic savings. According to Pastore, by reducing real wages, local currency depreciation, would reduce aggregate consumption and demand. This argument, however, only considers the very short term. Efficient business firms using world-class state-of-the-art technology are quick to realize that they have become competitive, that they can now sell on both the domestic and foreign markets, and resume investment. The exchange rate therefore works like a switch that connects (or disconnects) the country\'s competent business firms to or from their markets. This paper aims to contribute to the debate. Along the same lines as Bresser-Pereira and Gala (2007), we develop a model and provide empirical evidence to explore the macro-economic channel of the effects of the exchange rate and foreign savings on domestic savings. Starting from a theoretical and empirical perspective different from Montiel and Sérven\'s, we find empirical results other than those these authors present. Besides this brief introduction the paper has four more sections and a conclusion. Section 2 provides theoretical views of the effects of currency depreciation on the levels of income, consumption, aggregate investment and domestic and foreign savings. Section 4 theoretically evaluates the influence of foreign savings on domestic savings, and the following section presents our empirical analysis of the relation between domestic savings and real exchange rate. Finally, the paper\'s conclusions are presented in Section 5.
Model Let us assume a Stateless economy whose product is the sum of investment, consumption and exports minus imports; the gross income is the sum of worker wages, professional middle-class salaries and profits, and the national income is the gross income minus returns on capital transferred abroad. Investment equals domestic plus foreign savings. Macro-economically, investment determines savings ex-ante; savings finance investment ex-post. The income level is determined by consumption and investment spending. Foreign savings, that is, the savings a country receives from abroad, equals the current account deficit, which, in turn, corresponds to the balance of trade plus net revenue sent abroad. As a strategic macro-economic price, the exchange rate (θ), in addition to determining exports and imports and, therefore, the current account deficit or surplus, or foreign savings (foreign savings or dissavings), also determines investments and domestic savings. Many factors may determine the appreciation (or depreciation) of the exchange rate: reduced current account balances (usually associate with the policy of growth with foreign savings), capital inflows to finance the resulting deficit, capital inflows that exceed outflows and increase the country\'s reserves. Given an appreciation of the exchange rate due to any of these reasons, how will tropic hormone affect savings and investment?