International Capital Mobility: What Do Saving-Investment Correlations Tell Us? Comment on Dooley, Frankel, and Mathieson

Abstract

of the substantial integration of international financial markets. The concept of covered interest rate parity is frequently invoked when international macroeconomic models are constructed, at least for industrial countries, and is extensively employed by foreign exchange traders. Thus the observation of a strong positive correlation between national saving and domestic investment rates calls into question accepted views regarding the degree of international capital mobility. If international capital is freely and highly mobile, then there is little reason to expect countries with high saving rates to have high investment rates as well, or so the story goes. That is, world saving, like water seeking a common level, flows from lowto high-interest-rate countries, financing capital accumulation in the most productive economies. Hence, the empirical regularity of a high correlation between national saving and domestic investment rates is in apparent contradiction with integrated international financial markets. Can this conundrum be resolved? Dooley, Frankel, and Mathieson (1987) explained the apparent contradiction by distinguishing between the international integration of markets for bonds and of markets for physical capital. Assuming that bonds substitute perfectly across coun-