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Public and Private Saving and Investment

  • Van Wincoop, E.
  • Marrinan, J.

Several have shown that models with perfect international capital mobility can generate high correlations between aggregate savings and investment, as observed in the data. In this paper we decompose aggregate saving and investment into their two component parts, private and public. This leads to some striking observations. In almost all of the OECD countries we investigate during the 1975-1989 period, the private sector saving investment gap closely mirrors the government sector saving investment gap. Moreover, unlike the large aggregate saving investment correlations, private sectors saving investment correlations are on average close to zero. The paper investigates these and other moments associated with the public and private saving and investment in the context of models with perfect capital mobility. The paper devotes significant attention to modeling the government sector. Rules for taxation, government consumption and investment are specified, estimated, and fed into the model simulations. We find that while models are fiscal, technology and interest rate shocks are able to generate negative correlations between the public and private sector saving investment gaps, these correlations still fall significantly short of the very negative correlations observed in the data. Moreover, The models are not able to generate correlations between private saving and investment that are much lower than those between total saving and investment.

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Paper provided by Stockholm - International Economic Studies in its series Papers with number 546.

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Length: 29 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:stocin:546
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  1. Baxter, M., 1992. "Financial Market Linkages and the International Transmission of Fiscal Policy," RCER Working Papers 336, University of Rochester - Center for Economic Research (RCER).
  2. Tobin, James, 1983. "'Domestic saving and international capital movements in the long run and the short run' by M. Feldstein," European Economic Review, Elsevier, vol. 21(1-2), pages 153-156.
  3. Martin Feldstein & Philippe Bacchetta, 1989. "National Saving and International Investment," NBER Working Papers 3164, National Bureau of Economic Research, Inc.
  4. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  6. Roubini, N., 1989. "Current Account And Budget Deficits In An Intertemporal Model Of Consumption And Taxation Smoothing. A Solution To The "Feldstein-Horioka" Puzzel," Papers 569, Yale - Economic Growth Center.
  7. Gary D. Hansen & Randall Wright, 1992. "The labor market in real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-12.
  8. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
  9. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December.
  10. 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.
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  13. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November.
  14. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  15. Feldstein, Martin, 1983. "Domestic saving and international capital movements in the long run and the short run," European Economic Review, Elsevier, vol. 21(1-2), pages 129-151.
  16. Maurice Obstfeld, 1985. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
  17. Michael Mussa & Morris Goldstein, 1993. "The integration of world capital markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 245-330.
  18. Willem H. Buiter, 1984. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc.
  19. Alan C. Stockman & Lars E.O. Svensson, 1985. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  20. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-36, June.
  21. Borensztein, Eduardo R., 1989. "Fiscal policy and foreign debt," Journal of International Economics, Elsevier, vol. 26(1-2), pages 53-75, February.
  22. Canova, Fabio, 1993. "Sources and Propagation of International Business Cycles: Common Shocks or Transmission?," CEPR Discussion Papers 781, C.E.P.R. Discussion Papers.
  23. Kollmann, R., 1993. "Fiscal Policy, Technology Shcks and the US Trade Balance Deficit," Cahiers de recherche 9313, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  24. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
  25. 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.
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