Domestic Saving, Current Accounts, and International Capital Mobility

Abstract

This paper examines the Feldsteing-Horioka proposition that over the medium run variants in a country's domestic saving rate are reflected almost exclusively in offsetting movements in domestic investment rather than in the country's current account. Data on 23 OECD countries for the four OECD business cycles during the period 1963-1981 are used to investigate this proposition. The evidence presented in this paper is inconsistent with the Feldstein-Horioka proposition; that is there appears to be a substantial degree of medium-term net international capital mobility. Nevertheless, it is found that over long period of time average current accounts tend to be fairly small in absolute value. Some possible explanations of this phenomenon are presented and policy implications are discussed.