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Marquette University e-Publications@Marquette Economics Faculty Research and Pu lications Business Administration, College of 12-1-2004 Private Savings in Transition Economies: Are There Terms of Trade Shocks? Abdur Chowdhury Marquette University, abdur.chowdhury@marquette.edu Accepted version. Comp arative Economic Studies, Vol. 46, No. 4 (December 2004): 487-514. DOI. © Palgrave Macmillan 2004. Used with permission. Private Savings in Transition Economies: Are There Terms of Trade Shocks? By Abdur R. Chowdhury1 Economic agents in the transition economies are subject to tight credit constraints, which are more pronounced during bad state of nature. Thus, adverse shocks to commodity prices in the world market can force them to reduce savings by a larger amount than they would otherwise have. Empirical analysis using a dynamic panel model and data from 21 transition economies confirm that most of the determinants of savings identified in the literature also apply to the transition economies. The transitory component in the terms of trade have a larger positive impact than the permanent component. This reflects the lack of access to foreign borrowing. Although the impact of terms of trade shocks is found to be asymmetric, the magnitude of the impact appears to be small. The results are robust for alternative estimators, determinants and country groupings. Introduction Savings in the transition economies of Central and Eastern Europe and Central Asia involved the shift from centralised investment to decentralised savings as the economic system moved from central planning to market principles. The absence of efficient domestic credit and capital markets and limited access to international financial markets due to specific macroeconomic and institutional risks have made private savings a key determinant of welfare in these economies. Without savings, households have few mechanisms to smooth unexpected