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Interpreting Saving-Investment Correlations

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  • W. Jansen

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Abstract

Feldstein and Horioka (1980) argued that the cross-sectional correlation of saving and investment provides a test of global capital mobility. We argue that the long-run correlation is determined by the intertemporal budget constraint, limited capital mobility and current account targeting. The short-run correlation reflects limited capital mobility and adjustment to supply and demand shocks. Our empirical analysis shows that the short-run correlation varies across countries and not over time, which suggests that it is a country-specific business cycle fact. The long-run correlation has substantially decreased over time, which suggests that limited capital mobility is partly responsible for its high value in the past. Copyright Kluwer Academic Publishers 1998

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 9 (1998)
Issue (Month): 3 (July)
Pages: 207-219

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Handle: RePEc:kap:openec:v:9:y:1998:i:3:p:207-219

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: investment; saving; capital mobility;

References

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  1. Jansen, W. Jos, 1997. "Can the intertemporal budget constraint explain the Feldstein-Horioka puzzle?," Economics Letters, Elsevier, vol. 56(1), pages 77-83, September.
  2. Jansen, W.J. & Schulze, G.G., 1993. "Theory-Based Measurement of the Saving-Investment Correlation with an Application to Norway," Papers, Erasmus University of Rotterdam - Institute for Economic Research 9302-g, Erasmus University of Rotterdam - Institute for Economic Research.
  3. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 79-113, July.
  4. Danthine, J.P. & Donaldson, J.B., 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Papers fb-_91-11, Columbia - Graduate School of Business.
  5. Baxter, M. & Crucini, M.J., 1990. "Explaining Saving/Investment Correlation," RCER Working Papers 224, University of Rochester - Center for Economic Research (RCER).
  6. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  7. Daniel Levy, 2005. "Investment-Saving Comovement under Endogenous Fiscal Policy," International Finance, EconWPA 0505008, EconWPA.
  8. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 24(1), pages 55-103, January.
  9. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc.
  10. Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(4), pages 675-697, December.
  11. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  12. J. Mcclure, 1994. "The Feldstein-Horioka puzzle: The IS-LM model with optimal policy," Open Economies Review, Springer, Springer, vol. 5(4), pages 371-382, October.
  13. Finn, Mary G., 1990. "On savings and investment dynamics in a small open economy," Journal of International Economics, Elsevier, vol. 29(1-2), pages 1-21, August.
  14. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(436), pages 620-27, May.
  15. Jos Jansen, W, 1996. "Estimating saving-investment correlations: evidence for OECD countries based on an error correction model," Journal of International Money and Finance, Elsevier, Elsevier, vol. 15(5), pages 749-781, October.
  16. Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(414), pages 1162-70, September.
  17. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
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Citations

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Cited by:
  1. Saten Kumar & B. Bhaskara Rao, 2011. "A Time‐series Approach to the Feldstein–Horioka Puzzle with Panel Data from the OECD Countries," The World Economy, Wiley Blackwell, vol. 34(3), pages 473-485, 03.
  2. Jean Fouré & Agnès Bénassy-Quéré & Lionel Fontagné, 2012. "The Great Shift: Macroeconomic projections for the world economy at the 2050 horizon," Working Papers 2012-03, CEPII research center.
  3. Payne, James E., 2005. "Savings-investment dynamics in Mexico," Journal of Policy Modeling, Elsevier, Elsevier, vol. 27(5), pages 525-534, July.
  4. Kollias, Christos & Mylonidis, Nikolaos & Paleologou, Suzanna-Maria, 2008. "The Feldstein-Horioka puzzle across EU members: Evidence from the ARDL bounds approach and panel data," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 380-387.
  5. Herwartz, Helmut & Xu, Fang, 2007. "A functional coefficient model view of the Feldstein-Horioka puzzle," Economics Working Papers 2007,14, Christian-Albrechts-University of Kiel, Department of Economics.
  6. Mohammad, Masud Alam & Mohammad, Rafiqul Islam, 2010. "Revisiting the Feldstein-Horioka Hypothesis of savings, investment and capital mobility: evidence from 27 EU countries," MPRA Paper 39383, University Library of Munich, Germany.
  7. Bangake, Chrysost & Eggoh, Jude C., 2012. "Pooled Mean Group estimation on international capital mobility in African countries," Research in Economics, Elsevier, Elsevier, vol. 66(1), pages 7-17.
  8. Telatar, Erdinc & Telatar, Funda & Bolatoglu, Nasip, 2007. "A regime switching approach to the Feldstein-Horioka puzzle: Evidence from some European countries," Journal of Policy Modeling, Elsevier, Elsevier, vol. 29(3), pages 523-533.
  9. Li, Cheng, 2010. "Savings, investment, and capital mobility within China," China Economic Review, Elsevier, vol. 21(1), pages 14-23, March.
  10. S. Venkata SESHAIAH, 2014. "On The Estimation of the Determinants of the Current Account Deficits: A Case of Indian Economy," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 14(1), pages 203-214.

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