Interpreting Saving-Investment Correlations
Feldstein and Horioka (1980) argued that the cross-sectional correlation of saving and investment provides a test of global capital mobility. We argue that the long-run correlation is determined by the intertemporal budget constraint, limited capital mobility and current account targeting. The short-run correlation reflects limited capital mobility and adjustment to supply and demand shocks. Our empirical analysis shows that the short-run correlation varies across countries and not over time, which suggests that it is a country-specific business cycle fact. The long-run correlation has substantially decreased over time, which suggests that limited capital mobility is partly responsible for its high value in the past. Copyright Kluwer Academic Publishers 1998
Volume (Year): 9 (1998)
Issue (Month): 3 (July)
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