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Domestic saving and international capital movements in the long run and the short run

  • Feldstein, Martin

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.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 21 (1983)
Issue (Month): 1-2 ()
Pages: 129-151

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Handle: RePEc:eee:eecrev:v:21:y:1983:i:1-2:p:129-151
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. 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.
  2. Daniel J. Frisch, 1981. "Issues in the Taxation of Foreign Source Income," NBER Working Papers 0798, National Bureau of Economic Research, Inc.
  3. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  4. David G. Hartman, 1980. "International Effects on the U.S. Capital Market," NBER Working Papers 0581, National Bureau of Economic Research, Inc.
  5. 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.
  6. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters, in: Exchange Rate Theory and Practice, pages 121-152 National Bureau of Economic Research, Inc.
  7. David G. Hartman, 1981. "Domestic Tax Policy and Foreign Investment: Some Evidence," NBER Working Papers 0784, National Bureau of Economic Research, Inc.
  8. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
  9. William H. Branson, 1970. "Monetary Policy and the New View of International Capital Movements," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 235-270.
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