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International Capital Mobility in Developing Countries vs. Industrial Countries: What do Saving-Investment Correlations Tell Us?

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  • Jeffrey A. Frankel
  • Michael P. Dooley
  • Donald Mathieson

Abstract

The finding of Feldstein and Horioka (1980) that countriesf investment rates are highly correlated with their national saving rates has by now been confirmed by many subsequent studies, even though their inference that international capital mobility nust be low has not been as widely accepted. This paper examines the statistical relationship between national saving and investment in a sample that includes not only 14 industrialized countries, but also 50 developing countries. The paper addresses some of the econometric critiques that have been aimed at the Feldstein-Horioka work. Contrary to what one would expect from consideration of capital mobility, the coefficient appears higher for industrialized countries than for developing countries, and higher after 1973 than before. Our interpretation of the saving-investment evidence is that the hypothesis of a high degree of substitutability for claims on physical capital located in different countries is not supported by the data. International substitutability for financial capital may be nigh, but this is a separate condition (which is properly tested by looking directly at rates of return). High international substitutability for bonds would imply high international substitutability for physical capital if capital were perfectly substitutable for bonds within each country, but there is no reason for this to hold, any more than there is for all goods to be perfect substitutes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2043.

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Date of creation: Oct 1986
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Publication status: published as Frankel, Jeffrey A., Michael Dooley, and Donald Mathieson, "International Capital Mobility: What do Saving-Investment Correlations Tell Us?,"International Monetary Fund Staff Papers, Vol 34, September 1987, pp. 503-530.
Handle: RePEc:nbr:nberwo:2043

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  1. Gerard Caprio & David H. Howard, 1983. "Domestic saving, current accounts, and international capital mobility," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 244, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. Martin Feldstein, 1991. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Chapters, National Bureau of Economic Research, Inc, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353 National Bureau of Economic Research, Inc.
  4. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 314-29, June.
  5. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 3(3), pages 327-342, December.
  6. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, American Economic Association, vol. 70(2), pages 331-37, May.
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Cited by:
  1. Liliane Karlinger, 2002. "The Impact of Common Currencies on Financial Markets: A Literature Review and Evidence from the Euro Area," Working Papers, Bank of Canada 02-35, Bank of Canada.
  2. Lapp, Susanne, 1996. "The Feldstein-Horioka paradox: A selective survey of the literature," Kiel Working Papers 752, Kiel Institute for the World Economy.
  3. Lori Leachman, 1991. "Saving, investment, and capital mobility among OECD countries," Open Economies Review, Springer, Springer, vol. 2(2), pages 137-163, June.
  4. Buiter, Willem H, 1993. "Public Debt in the USA: How Much, How Bad and Who Pays?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 791, C.E.P.R. Discussion Papers.
  5. Shigeyuki Hamori, 2007. "International Capital Flows and the Frankel-Dooley-Mathieson Puzzle," Economics Bulletin, AccessEcon, vol. 15(19), pages 1-12.
  6. Jane Marrinan & Eva Ventura, 1995. "Efectos del gasto publico sobre el ahorro y la inversión en una economía abierta," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 19(3), pages 349-370, September.

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