Investment-Saving Co-Movement Under Endogenous Fiscal Policy

Open Economies Review, Vol. 6, No. 3, pp. 237-254, July 1995

Posted: 27 Feb 2005

See all articles by Daniel Levy

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis

Abstract

I expand Feldstein's (1983) model by including flexible exchange rate and by introducing endogenous fiscal policy. Using the 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 co-movement 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 US 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.

Keywords: Investment-Saving Comovement, Feldstein-Horioka Puzzle, International Capital Mobility, Endogenous Fiscal Policy

JEL Classification: F21, F32, F40

Suggested Citation

Levy, Daniel, Investment-Saving Co-Movement Under Endogenous Fiscal Policy. Open Economies Review, Vol. 6, No. 3, pp. 237-254, July 1995. Available at SSRN: https://ssrn.com/abstract=671805

Daniel Levy (Contact Author)

Bar-Ilan University - Department of Economics ( email )

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Israel
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HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )

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HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html

Rimini Center for Economic Analysis ( email )

Wilfrid Laurier University
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Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://rcea.org/

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