contradicting theoretical and empirical results assessment of this equivalence, we cannot infer a sign for the impact of public deficit on domestic savings rate.<sup>7</sup> Given the short time span (key macro data available only for the period 2002-2011), we use macroeconomic quarterly data obtained from the Armenian Ministry of Finance. Table 1 presents the means of the main variables included in our estimation, separating the two periods 2002-2007 and 2008-2011 to capture before-after crisis differences. Figure 2 plots some correlations of the aggregate saving rate and some expected determinants.

**Table 1: Means and Standard Deviations of Main Variables, 2002-2007 and 2008-2011**

|Variables|Mean(Standa|rd Deviation)|
|---|---|---|
||**2002-2007**|**2008-2011**|
|Savings rate|7.24%(_0.028_)|4.42%(_0.039_)|
|GDPper capita(thousands AMD)|167.6(_15.0_)|256.5(_20.4_)|
|Real Exchange rate|100.9(_2.9_)|128.1_(2.2_)|
|Time Deposit rate|6.5(_0.34_)|8.2(_0.30_)|
|Remittances(%GDP)|19.1%(_0.013_)|18.3%(_0.005_)|
|Openness:(export+import)/GDP|0.75(_0.04_)|0.64(_0.03_)|

_Sources_ : Armenian Ministry of Finance and authors’ calculations.

Figure 2 shows the evolution of the savings rate and five variables: the log of the GDP per capita, real exchange rate, time deposit rate, openness and public deficit. In this figure, all the variables are seasonally adjusted using a HP filter.<sup>8</sup> Savings rate and GDP per capita at market price appear to have been synchronized from 2002 to 2007, when the country was enjoying double digit growth rates. Since then, this synchronization has been broken (figure 2, panel a). The evolution of the quarterly change in savings rate and the GDP per capita from one quarter to the next appears synchronized during the entire period (figure 2, panel b).We notice a steady increase in the REER (appreciation) during the entire period (figure 2, panel c). Concerning the time deposit rate, a decreasing trend is observed from 2002 to 2006, followed by an increasing trend from 2006 onwards (figure 2, panel d), which can be explained by a high demand for funds from financial institutions in the wake of the construction boom. Openness has been steadily decreasing until the crisis hit Armenia, which makes it mirror an opposite trend to the savings rate (figure 2, panel e).. With regards to the public deficit, we notice that it was quite stable before the 2009 crisis. Since 2009 however, there has been a large increase in the public deficit as in many countries.

> 7 If a government finances itself by raising debt, the private agents (household and corporate) will anticipate a future increase in taxes and will consume less and save more to face the future increase in taxation. This result is based on the hypothesis of perfect capital market, perfect substitution between government and private savings and absence of uncertainty and, especially, a representative infinitely-lived agent. That result does not hold in overlapping generation (OLG) models (like in the Blanchard-Yaari model, 1985-1965) and when Government and private sectors do not face the same credit constraint. Also, empirically some papers (e.g. Barro, 1989; Khalid, 1996) reject the full Ricardian equivalence mostly due to the fact that private and public savings are not perfect substitute and the presence credit-constrained individuals.

8 The un-adjusted quarterly variables depict a similar pattern with the savings rate variable. In such case, using the adjusted variables in the regressions can lead biased estimators as demonstrated in Annex 1. For this reason, the regressions are run with the original variable with introduction of quarter dummies to control for seasonality.

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