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Domestic Saving and International Capital Flows Reconsidered

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  • Alan M. Taylor

Abstract

A long literature since Feldstein and Horioka's seminal contribution documents the strong correlation of domestic saving and investment rates since the 1960s. According to conventional wisdom, the result provides evidence of international capital market imperfections. The macroeconomic theory of small open economies prescribes a relationship between the composition of aggregate demand and its relative price structure, a linkage hitherto ignored in the saving-investment literature. Theory and evidence also suggest a role for growth and demographic effects, well known in previous studies. If one controls for these effects, the standard correlation of saving and investment disappears. International capital markets may be better integrated than once thought, and the former correlations may have been spurious. The pattern of domestic investment rates is better explained by domestic price distortions and other variables than by domestic saving constraints.

Suggested Citation

  • Alan M. Taylor, 1994. "Domestic Saving and International Capital Flows Reconsidered," NBER Working Papers 4892, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4892
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    References listed on IDEAS

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    1. Ronald D Lee & Andrew Mason & Tim Miller, 1998. "Saving, Wealth, and Population," Working Papers 199805, University of Hawaii at Manoa, Department of Economics.
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    3. Franco Modigliani & Arlie Sterling, 1983. "Determinants of Private Saving with Special Reference to the Role of Social Security—Cross-country Tests," International Economic Association Series, in: Franco Modigliani & Richard Hemming (ed.), The Determinants of National Saving and Wealth, chapter 2, pages 24-55, Palgrave Macmillan.
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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