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The Link between Domestic Investment and Domestic Savings in Open Economies: Evidence from Balanced Stochastic Growth

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  • Grinols, Earl L
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    Abstract

    What relationship between domestic and foreign variables could explain the observed high correlation between domestic savings and investment in OECD countries with perfect capital mobility? Is such an explanation empirically supportable? This paper constructs a stochastic continuous-time optimizing model of a small open country. It finds the formula for the implied theoretical correlation between domestic savings and investment--of interest in its own right--and calibrates the model using regression coefficients and stock market data from the U.S. and Canada. The model accounts quite well for the observed investment-savings correlation, even in the presence of perfect capital mobility. Copyright 1996 by Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Review of International Economics.

    Volume (Year): 4 (1996)
    Issue (Month): 2 (June)
    Pages: 119-40

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    Handle: RePEc:bla:reviec:v:4:y:1996:i:2:p:119-40

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576

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    Cited by:
    1. Dibooglu, Sel & Kenc, Turalay, 2009. "Welfare cost of inflation in a stochastic balanced growth model," Economic Modelling, Elsevier, vol. 26(3), pages 650-658, May.
    2. Liutang Gong & Heng-fu Zou, 2001. "Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness," CEMA Working Papers 53, China Economics and Management Academy, Central University of Finance and Economics.
    3. Evans, Lynne & Kenc, Turalay, 2004. "FOREX risk premia and policy uncertainty: a recursive utility analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(1), pages 1-24, February.
    4. Jean-Pierre Berdot & Gérard Kébabdjian & Jacques Léonard, 2003. "Corrélations investissement-épargne et mobilité internationale des capitaux," Recherches économiques de Louvain, De Boeck Université, vol. 69(1), pages 5-39.

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