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Investment-Saving Comovement under Endogenous Fiscal Policy

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  • Daniel Levy

    (Bar-Ilan University)

Abstract

I expand Feldstein’s (1983) model by including flexible exchange rate and by introducing endogenous fiscal policy. Using this model, I demonstrate how a positive investment-saving correlation can arise in a world with endogenous fiscal policy. I show that this correlation does not depend on capital mobility and therefore is compatible with any degree of capital mobility. This implies that the observed investment- saving comovement is not necessarily due to imperfect capital mobility. The model has a testable implication: it predicts a lack of Granger causality from private saving to private investment. Empirical examination of this prediction indicates that U.S. time series data is compatible with the hypothesis of endogenous fiscal policy during a flexible exchange rate period, but not during a fixed exchange rate period.

Suggested Citation

  • Daniel Levy, 2005. "Investment-Saving Comovement under Endogenous Fiscal Policy," International Finance 0505008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0505008
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Eiriksson, Agust A., 2011. "The saving-investment correlation and origins of productivity shocks," Japan and the World Economy, Elsevier, vol. 23(1), pages 40-47, January.
    2. repec:kap:iaecre:v:9:y:2003:i:2:p:140-151 is not listed on IDEAS
    3. Snir, Avichai & Levy, Daniel, 2010. "Economic Growth in the Potterian Economy," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 211-236.
    4. Daniel Levy, 2003. "Is the Feldstein-Horioka Puzzle Really a Puzzle?," Working Papers 2003-02, Bar-Ilan University, Department of Economics.
    5. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
    6. João Sousa Andrade, 2006. "Mobilidade do Capital e Sustentabilidade Externa: uma aplicação da tese de F-H a Portugal (1910-2004)," GEMF Working Papers 2006-04, GEMF, Faculty of Economics, University of Coimbra.
    7. Ignacio Mauleón & Raul Larrion, 2003. "Growth and the current account: Malaysia and Singapore," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 9(2), pages 140-151, May.
    8. Daniel Levy, 2000. "Investment-Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 100-137, January.
    9. João Sousa Andrade, 2007. "La these de Feldstein-Horioka: une mesure de la mobilité internationale du capital," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 54(1), pages 53-67, March.
    10. Ekong, Christopher N. & Onye, Kenneth U., 2015. "International Capital Mobility and Saving-Investment Nexus in Nigeria: Revisiting Feldstein-Horioka Hypothesis," MPRA Paper 88232, University Library of Munich, Germany.
    11. W. Jansen, 1998. "Interpreting Saving-Investment Correlations," Open Economies Review, Springer, vol. 9(3), pages 207-219, July.
    12. Jos Jansen, W, 1996. "Estimating saving-investment correlations: evidence for OECD countries based on an error correction model," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 749-781, October.
    13. João Sousa Andrade, 2007. "L’Intégration Européenne et la Soutenabilité Externe de l’Union Européenne: une application de la thèse de Feldstein-Horioka," GEMF Working Papers 2007-05, GEMF, Faculty of Economics, University of Coimbra.

    More about this item

    Keywords

    Feldstein-Horioka Puzzle; Investment; Saving; Capital Mobility; Endogenous Fiscal Policy;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other

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