Investment-Saving Comovement under Endogenous Fiscal Policy
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniel Levy, 2004.
"Is the Feldstein-Horioka Puzzle Really a Puzzle?,"
0402002, EconWPA, revised 12 May 2005.
- Engle, R. F. & Granger, C. W. J. (ed.), 1991. "Long-Run Economic Relationships: Readings in Cointegration," OUP Catalogue, Oxford University Press, number 9780198283393, May.
- Tesar, L.L., 1988.
"Savings, Investment And International Capital Flows,"
RCER Working Papers
154, University of Rochester - Center for Economic Research (RCER).
- Tesar, Linda L., 1991. "Savings, investment and international capital flows," Journal of International Economics, Elsevier, vol. 31(1-2), pages 55-78, August.
- Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," Papers 64, Brookings Institution - Working Papers.
- Ramon Moreno, 1988. "Saving, investment, and the U.S. external balance," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 3-17.
- Tamim Bayoumi, 1990. "Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behavior?," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 360-387, June.
- 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.
- Baxter, Marianne & Crucini, Mario J, 1993.
"Explaining Saving-Investment Correlations,"
American Economic Review,
American Economic Association, vol. 83(3), pages 416-36, June.
- Gerard Caprio & David H. Howard, 1983. "Domestic saving, current accounts, and international capital mobility," International Finance Discussion Papers 244, Board of Governors of the Federal Reserve System (U.S.).
- David Y. Wong, 1988. "What do saving - investment relationships tell us about capital mobility?," Working Papers 88-10, Federal Reserve Bank of Philadelphia.
- 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.
- Martin Feldstein, 1991. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353 National Bureau of Economic Research, Inc.
- Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
- Lawrence H. Summers, 1988.
"Tax Policy and International Competitiveness,"
in: International Aspects of Fiscal Policies, pages 349-386
National Bureau of Economic Research, Inc.
- Podivinsky, Jan M., 1998. "Testing misspecified cointegrating relationships," Economics Letters, Elsevier, vol. 60(1), pages 1-9, July.
- Lori Leachman, 1991. "Saving, investment, and capital mobility among OECD countries," Open Economies Review, Springer, vol. 2(2), pages 137-163, June.
- Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34.
- Nouriel Roubini, 1988.
"Current Account and Budget Deficits in an Intertemporal Model of Consumption and Taxation Smoothing. A Solution to the "Feldstein-Horioka Puzzle"?,"
NBER Working Papers
2773, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- Martin Feldstein & Philippe Bacchetta, 1991.
"National Saving and International Investment,"
in: National Saving and Economic Performance, pages 201-226
National Bureau of Economic Research, Inc.
- Glenn Otto & Tony S. Wirjanto, 1989. "National Savings and Domestic Investment in the Long Run: Some Time Series Evidence for the U.S. and Canada," Working Papers 754, Queen's University, Department of Economics.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Obstfeld, Maurice, 1986.
"Capital mobility in the world economy: Theory and measurement,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 24(1), pages 55-103, January.
- Maurice Obstfeld, 1985. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
- Gulley, O. David, 1992. "Are saving and investment cointegrated? : Another look at the data," Economics Letters, Elsevier, vol. 39(1), pages 55-58, May.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-29, June.
- repec:fth:harver:1463 is not listed on IDEAS
- Argimon, Isabel & Roldan, JoseMaria, 1994. "Saving, investment and international capital mobility in EC countries," European Economic Review, Elsevier, vol. 38(1), pages 59-67, January.
- Levy, D., 1990. "Investment-Saving Comovement, Capital Mobility, And Fiscal Policy," Papers 90-91-04, California Irvine - School of Social Sciences.
- Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
- 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.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0505008. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.