Estimating saving-investment correlations: evidence for OECD countries based on an error correction model

Abstract

Saving-investment correlations are important stylized facts in open economy macroeconomics and indicators of capital mobility. They are best estimated by an Error Correction Model (ECM), because an ECM is consistent with intertemporal general equilibrium models. The ECM is a synthesis of previous approaches. Applying the ECM to the OECD countries, we find that in general saving and investment are cointegrated. The ECM is more powerful in detecting cointegration than the two-step Engle-Granger procedure. Estimates of the saving-investment correlation are robust with respect to overdifferencing We find evidence of a large country effect and an increase in capital mobility within the OECD area.