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Investment-Saving Comovement under Endogenous Fiscal Policy

  • Daniel Levy

    (Bar-Ilan University)

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.

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Paper provided by EconWPA in its series International Finance with number 0505008.

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Date of creation: 15 May 2005
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Handle: RePEc:wpa:wuwpif:0505008
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Contact details of provider: Web page: http://128.118.178.162

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  1. Gulley, O. David, 1992. "Are saving and investment cointegrated? : Another look at the data," Economics Letters, Elsevier, vol. 39(1), pages 55-58, May.
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  26. Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34.
  27. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
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  29. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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