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Domestic Saving and International Capital Flows Reconsidered

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  • Alan M. Taylor

Abstract

A long literature since Feldstein and Horioka's seminal contribution documents the strong correlation of domestic saving and investment rates since the 1960s. According to conventional wisdom, the result provides evidence of international capital market imperfections. The macroeconomic theory of small open economies prescribes a relationship between the composition of aggregate demand and its relative price structure, a linkage hitherto ignored in the saving-investment literature. Theory and evidence also suggest a role for growth and demographic effects, well known in previous studies. If one controls for these effects, the standard correlation of saving and investment disappears. International capital markets may be better integrated than once thought, and the former correlations may have been spurious. The pattern of domestic investment rates is better explained by domestic price distortions and other variables than by domestic saving constraints.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4892.

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Date of creation: Oct 1994
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Handle: RePEc:nbr:nberwo:4892

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  1. James A. Brander & Steve Dowrick, 1993. "The Role of Fertility and Population in Economic Growth: Empirical ResultsFrom Aggregate Cross-National Data," NBER Working Papers 4270, National Bureau of Economic Research, Inc.
  2. Modigliani, Franco. & Sterling, Arlie., 1981. "Determinants of private saving with special reference to the role of social security : cross country tests," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1209-81., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 584.
  4. Ronald D Lee & Andrew Mason & Tim Miller, 1998. "Saving, Wealth, and Population," Working Papers, University of Hawaii at Manoa, Department of Economics 199805, University of Hawaii at Manoa, Department of Economics.
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