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National Saving and International Investment

In: National Saving and Economic Performance

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  • Martin Feldstein
  • Philippe Bacchetta

Abstract

This paper extends earlier work by Feldstein and Horioka on the relation between domestic saving rates and international capital flows or, equivalently, between domestic saving rates and domestic investment. The basic conclusion of the present analysis is that an increase in domestic saving has a substantial effect on the level of domestic investment although a smaller effect than would have been observed in the 1960s and 1970s. The savings retention coefficient for the 1980-86 period is 0.79, down from 0.91 in the l960s and 0.86 in the 1970s. The more closely integrated economies of the EEC also appear to have more outward capital mobility (i.e., a lower saving retention coefficient) than other OECD countries. There is no support for the view that the estimated saving-investment relation reflects a spurious impact of an omitted economic growth variable. Although budget deficits are inversely related to the difference between private investment end private saving, we reject the view that this reflects an endogenous response of fiscal policy in favor to the alter-native interpretation that the negative relation is evidence of crowding out of private investment by budget deficits. This interpretation is supported by the evidence that domestic investment responds equally to private saving and to budget deficits. The implication of the analysis thus supports the original Feldstein-Horioka conclusion that increase in domestic saving does raise a nation's capital stock and therefore the productivity of its workforce. Similarly, a tax on capital income is not likely to be shifted fully to labor and land by the outflow of enough capital to maintain the real rate of return unchanged.
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Suggested Citation

  • Martin Feldstein & Philippe Bacchetta, 1991. "National Saving and International Investment," NBER Chapters, in: National Saving and Economic Performance, pages 201-226, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:5992
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    1. Lawrence H. Summers, 1988. "Tax Policy and International Competitiveness," NBER Chapters, in: International Aspects of Fiscal Policies, pages 349-386, National Bureau of Economic Research, Inc.
    2. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 327-342, December.
    3. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    4. anonymous, 1984. "The 1984 budget," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 47, december.
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    6. anonymous, 1981. "The International Monetary Fund," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 44, june.
    7. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
    8. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
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