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The Link between Domestic Investment and Domestic Savings in Open Economies: Evidence from Balanced Stochastic Growth

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  • Grinols, Earl L

Abstract

What relationship between domestic and foreign variables could explain the observed high correlation between domestic savings and investment in OECD countries with perfect capital mobility? Is such an explanation empirically supportable? This paper constructs a stochastic continuous-time optimizing model of a small open country. It finds the formula for the implied theoretical correlation between domestic savings and investment--of interest in its own right--and calibrates the model using regression coefficients and stock market data from the U.S. and Canada. The model accounts quite well for the observed investment-savings correlation, even in the presence of perfect capital mobility. Copyright 1996 by Blackwell Publishing Ltd.

Suggested Citation

  • Grinols, Earl L, 1996. "The Link between Domestic Investment and Domestic Savings in Open Economies: Evidence from Balanced Stochastic Growth," Review of International Economics, Wiley Blackwell, vol. 4(2), pages 119-140, June.
  • Handle: RePEc:bla:reviec:v:4:y:1996:i:2:p:119-40
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    1. Robert C. Feenstra & James A. Levinsohn, 1989. "Distance, Demand, and Oligopoly Pricing," NBER Working Papers 3076, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Denis Nitikin & Chunli Shen & Qian Wang & Heng-fu Zou, 2012. "Water Service Delivery Reform in China: Safeguarding the Interests of the Poor," Annals of Economics and Finance, Society for AEF, pages 463-487.
    2. Jean-Pierre Berdot & Gérard Kébabdjian & Jacques Léonard, 2003. "Corrélations investissement-épargne et mobilité internationale des capitaux," Recherches économiques de Louvain, De Boeck Université, pages 5-39.
    3. Evans, Lynne & Kenc, Turalay, 2004. "FOREX risk premia and policy uncertainty: a recursive utility analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(1), pages 1-24, February.
    4. Dibooglu, Sel & Kenc, Turalay, 2009. "Welfare cost of inflation in a stochastic balanced growth model," Economic Modelling, Elsevier, vol. 26(3), pages 650-658, May.
    5. Gong, Liutang & Zou, Heng-fu, 2002. "Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 247-270, February.

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