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Theory-Based Measurement of the Saving-Investment Correlation with an Application to Norway

Author

Listed:
  • Jansen, W.J.
  • Schulze, G.G.

Abstract

We demonstrate that the correlation of saving and investment is measured best by an error correction model (ECM), because theory implies a cointegrating relation between these variables. The ECM comprises all previous specifications as special cases, which are shown to be potentially misspecified on theoretical grounds. We argue that the correlation can serve to reject the hypothesis of capital immobility, but not the one of capital mobility. Applying the ECM to Norway yields the following findings: First, the ECM outperforms prevailing specifications. Second, we detect structural breaks, which underpins the need for careful diagnostic testing and, third, the correlation's time profile is consistent with other indicators of capital mobility. The Feldstein-Horioka puzzle does not exist for Norway.
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Suggested Citation

  • Jansen, W.J. & Schulze, G.G., 1993. "Theory-Based Measurement of the Saving-Investment Correlation with an Application to Norway," Papers 9302-g, Erasmus University of Rotterdam - Institute for Economic Research.
    • Handle: RePEc:fth:erroec:9302-g
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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