Analysis of the Relationship between Saving and Investment in Korea: Influence of Foreign Exchange Crisis and Foreign Reserves

Abstract

Feldstein and Horioka (1980) pointed out that even in the open economy; there is a high correlation between total saving and investment. This paper analyzes the relationship between saving and total investment from the first quarter of 1970 to the second quarter of 2018 in Korea. As a result of estimating the savings retention parameter, the correlation between total saving and total investment in Korea was high before the foreign exchange crisis but it was lowered after. The same conclusions were obtained when analyzed the correlation between investment rate and saving rate. The adjustment of foreign exchange reserves was not related to the fall in the savings retention parameter. The foreign exchange crisis has weakened the link between domestic savings and domestic investment, and securing foreign reserves is not the cause.