Investment-Saving Comovement under Endogenous Fiscal Policy
AbstractI expand Feldstein’s (1983) model by including flexible exchange rate and by introducing endogenous fiscal policy. Using this model, I demonstrate how a positive investment-saving correlation can arise in a world with endogenous fiscal policy. I show that this correlation does not depend on capital mobility and therefore is compatible with any degree of capital mobility. This implies that the observed investment- saving comovement is not necessarily due to imperfect capital mobility. The model has a testable implication: it predicts a lack of Granger causality from private saving to private investment. Empirical examination of this prediction indicates that U.S. time series data is compatible with the hypothesis of endogenous fiscal policy during a flexible exchange rate period, but not during a fixed exchange rate period.
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0505008.
Date of creation: 15 May 2005
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Feldstein-Horioka Puzzle; Investment; Saving; Capital Mobility; Endogenous Fiscal Policy;
Other versions of this item:
- Daniel Levy, 1995. "Investment-saving comovement under endogenous fiscal policy," Open Economies Review, Springer, vol. 6(3), pages 237-254, July.
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
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