Domestic Saving and International Capital Flows Reconsidered

37 Pages Posted: 16 May 2000  

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: October 1994

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

Taylor, Alan M., Domestic Saving and International Capital Flows Reconsidered (October 1994). NBER Working Paper No. w4892. Available at SSRN: https://ssrn.com/abstract=227954

Alan M. Taylor (Contact Author)

University of California, Davis - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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