Abstract
This study examines the role of global, regional and domestic saving for domestic investment financing in the panel of Latin American and Caribbean countries along with its three regional integration blocks, namely SICA, Andean Community and MERCOSUR. Panel regression and rolling-window estimation results reveal that global saving is the main source of domestic investment financing in the region of Latin America and the Caribbean, SICA, Andean Community and MERCOSUR. The role of domestic and regional savings is rather limited, implying that there are weak regional and domestic channels that can funnel domestic and regional savings into investment in the analysed samples. The importance of regional agreement saving is insignificant and decreases over the analysed period except for the Andean Community. The results indicate low financial integration of the member-countries within the three regional trade agreements.
Highlights
The theory of the intertemporal current account predicts no correlation between domestic saving and investment under the assumption of perfect capital mobility
Considering that the majority of Latin American countries are undergoing the process of monetary integration within one of the three regional trade agreements, it is crucial to understand their level of financial integration within domestic and global capital markets
The results reveal that global saving is the main source for financing domestic investment in Latin American and Caribbean countries along with Andean Community, MERCOSUR and SICA member-states, indicating that Latin American countries are well integrated within global financial markets
Summary
The theory of the intertemporal current account predicts no correlation between domestic saving and investment under the assumption of perfect capital mobility. The first attempt to utilize the aforementioned theory with the aim of estimating the degree of capital mobility has been undertaken by Feldstein and Horioka (1980) Despite their predictions of increased capital flows resulting from the ongoing financial liberalization, the authors arrive at a perplexing result of a tight relationship between saving and investment close to one; as a result, they conclude that the world’s capital mobility is insignificant, and incremental saving tend to be invested domestically. Almost no studies have investigated saving-investment relationship for panels of Latin American regional trade agreements, including Andean Community, MERCOSUR, and SICA. This paper makes another contribution to the extant literature by investigating the importance of regional and global saving in investment financing in the Andean Community, MERCOSUR, and SICA. Estimation results reveal that global saving is the major source for financing domestic investment in the Latin American and Caribbean region, Andean Community, MERCOSUR, and SICA.
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