To address the new reality, LAC will need to save more…  We find aggregate demand composition (saving) to matter for growth…  Growth is not just about supply (investment prospects, productivity…)  Foreign and domestic saving are not perfect substitutes  …through three key channels  The real exchange (ER) rate channel (external competitiveness effect)  The real interest rate (IR) channel (sustainability effect)  The endogenous saving (ES) channel (saving-follows-growth effect)  These findings, which deviate from the conventional neoclassical view,…  That saving matters neither for growth nor for the real exchange rate  That growth leads to lower saving  …reflect frictions that limit factor (especially capital) mobility and help reconcile macro theory with well established observations  Hence, this is essentially a middle income country feature  The policy implications are relevant to LAC … but fraught with tensions 3
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