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Domestic Saving and International Capital Movements in the Long Run and the Short Run

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  • Martin Feldstein

Abstract

The evidence and analysis in this paper support the earlier findings of Feldstein and Horioka (1980) that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment. New estimates for the post-OPEC period 1974-79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 OECD countries. An explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long-run response of international capital flows than to their short-run behavior. Coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross-country sample of these averages. A portfolio model of international capital allocation that is presented in the paper indicates that the short-run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response.

Suggested Citation

  • Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0947
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    1. Robert A. Mundell, 1960. "The Monetary Dynamics of International Adjustment under Fixed and Flexible Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 74(2), pages 227-257.
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    3. Daniel J. Frisch, 1981. "Issues in the Taxation of Foreign Source Income," NBER Working Papers 0798, National Bureau of Economic Research, Inc.
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    7. David G. Hartman, 1981. "Domestic Tax Policy and Foreign Investment: Some Evidence," NBER Working Papers 0784, National Bureau of Economic Research, Inc.
    8. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324, Elsevier.
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    10. Obstfeld, Maurice, 1980. "Imperfect asset substitutability and monetary policy under fixed exchange rates," Journal of International Economics, Elsevier, vol. 10(2), pages 177-200, May.
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