International Capital Mobility: What Do Saving-Investment Correlations Tell Us? Reply to Miller

Abstract

M ILLER'S INTERESTING ARGUMENT is a good example of a class of alternative explanations of saving-investment correlations. The basic idea behind these arguments is that sources of independent shocks to national saving and investment rates that are thought to be important quantitatively are either not independent or are not shocks at all. In this case, it is argued that there are good reasons to believe that changes in debt-financed government expenditures are fully offset ex ante by changes in an ultrarational private sector's saving and investment behavior. Thus, from the point of view of international capital markets, no disturbance will be observed. A similar argument is that, although there are various shocks to the system that appear to require net saving flows across countries, these shocks are fully dissipated by changes in relative prices so that no observed intertemporal trade is predicted. In general, we find these arguments interesting but, so far, unconvincing. In reference to Miller's argument, we would assume that there are other shocks to national saving and investment rates, in addition to changes in governments' saving and investment behavior. An ultrarational private sector might neutralize changes in government behavior,