Saving-investment Correlation Research Articles

Saving and Investment Nexus in Indonesia: Revisiting Feldstein-Horioka Hypothesis

The Indonesian economy cannot be separated from interaction with the economies of other countries, so changes in global conditions will also affect the Indonesian economy. A significant investment is needed to drive the domestic economy, while domestic capital accumulation is still insufficient. The relationship between savings and investment put forward by Feldstein and Horioka (FH) was reviewed for the case of Indonesia from 1981 to 2020. The VECM found a long-term and short-term relationship and a bidirectional Granger causality between saving and investment. The strength of the saving-investment correlation confirms the validity of the FH hypothesis in Indonesia.

Impact of foreign direct investment on economy, environment, technology, productivity and energy of the countries

In today's world, attracting Foreign Direct Investment (FDI) is one of the essential tasks of governments. But what effect will the absorption of Foreign Direct Investment have on that society? Based on the review of 18 articles, the researcher has categorized these effects into the following 5 factors. These factors belong to Economy, Environment, Technology, Productivity, and Energy. Following the results of previous studies, the impacts of the five factors mentioned on communities in the effect of FDI are reviewed. The Boolean search methodology is chosen as the methodology, also the finding of the researcher is mentioned in the paragraphs below. FDI not only aids in the development of this industry, but it also has a substantial impact on the micro and macro levels. FDI has a favorable impact on the growth rate of per capita GDP. In addition, the African continent saw significant economic expansion. The impact of financial systems may explain why developing-country correlations are low while developed-country saving-investment correlations are strong. the impact of GDP and energy usage on Carbon dioxide emissions are significant, whereas the impact of FDI on Carbon dioxide emissions is positive but minor. Industrial SO2 emissions will increase by 0.098 percent for every 1% growth in FDI capital stock. FDI rising emissions in middle-income countries in the near term while reduces them in high-income nations. FDI from TMH areas has a substantial beneficial influence on the productivity of the wood products industry at the industrial level. On energy consumption, FDI revealed a negative scale impact, a structural effect, and a positive technical impact. In the end, the impact of foreign direct investment on worker productivity is positive. The researcher recommends that politicians make every effort to improve their country's political and judicial conditions to attract more FDI to their countries.

Saving-investment correlations and the financial globalization of the BRICS countries

ABSTRACT This study examines the long-run relationship between domestic saving and investment, and assesses the financial globalization of the BRICS economies. The model estimated in one-regime setting with no structural break and in sample-split setting with single as well as multiple structural breaks provides dominant support for the presence of long-run relationship between domestic saving and investment. The slope parameter of saving and implied home-bias in the asset portfolios of investors is generally small to medium for Brazil and large for Russia, India, China, and South Africa (RICS). The small to medium slope coefficient of saving for Brazil suggests the presence of moderate to high international mobility of capital. Financial markets are characterized by financial frictions and there is imperfect integration of RICS with the global financial markets. While the slope coefficient of saving is numerically large for RICS and small to medium for Brazil, it is not strictly identical across estimators. This finding can be generalized to mimic the findings of the extant literature. The academic debates and economic controversies – which surface in almost every area of empirical research – could be ascribed, inter alia, to the use of different methodologies and test statistics across studies.

EVOLUTION OF CAPITAL MOBILITY IN SUB-SAHARAN AFRICAN COUNTRIES:

The paper re-examines the level of capital mobility in 37 Sub-Saharan African countries by employing the Feldstein and Horoika framework over the period of 1980-2015. The study utilizes panel data to assess the degree of capital flows in these countries. The study findings reveal low saving-investment correlation in Sub-Saharan African countries, which indicates the presence of a high degree of capital mobility in the region. This is consistent with the previous empirical studies that employed the Feldstein-Horoika methodology in less developed countries. To complement poor savings, the study findings reveal that foreign aid, and international finance play a crucial role in financing domestic investments in many of the studied countries, with the exception of South Africa. The study recommends for innovations in improving domestic savings and regional investment environment.

Saving–investment correlations and the mobility of capital in the OECD countries: New evidence from cointegration breakdown tests

ABSTRACTThis study examines the long-run relationship between domestic saving and investment and undertakes an in-depth account of short-period breaks in the cointegrating vector for 24 OECD countries. The analysis is carried out in a time-series setting to take a country-by-country account of the evidence. The end-of-sample cointegration breakdown tests are performed on both FMOLS and FIML estimates of the model. The cointegrating relationship between domestic saving and investment prevails and the implied intertemporal budget constraint holds for most countries. The cointegration breaks down for some countries during the sub-sample periods. The results are generally consistent across various cointegration breakdown tests.

Has the Feldstein-Horioka puzzle waned? Evidence from time series and dynamic panel data analysis

This objective of this paper is to examine the Feldstein-Harioka puzzle by using both time series analysis that accommodates structural breaks, and dynamic panel error-correction method. Our sample consists of 118 countries over the period 1981–2013. Results from ARDL model suggest that long-run capital is highly mobile in high-income countries (HIC), moderately mobile for both middle- and low-income countries. Our finding of the low long-run saving coefficient for HICs shows that failure to account for a structural break may overstate the long-run saving coefficient. Findings from the pooled mean group estimators suggest that capital is moderately mobile in the middle-income countries, and highly immobile in the high- and low-income countries in the long run. Our findings highlight that ignoring structural break, the type of data (time series/panel), and econometric method used can affect the conclusion about capital mobility. The adjustment coefficient in the time series analysis is comparatively higher than the panel data analysis. We also test whether country size and openness affect the saving–investment correlation. While the effect of country size on the saving coefficient is mixed, the saving estimate is found to be a function of the degree of openness. We also discuss policy implications of our findings on the current account sustainability.

МОДИФИКАЦИЯ IS-LM-BPМОДЕЛИ В РАМКАХ КОНЦЕПЦИИ НЕОКЛАССИЧЕСКОГО СИНТЕЗА

With the intensification of processes caused by globalization, the relevance of the studies about the impact of exogenous shocks in the global markets for wealth and money on the macroeconomic parameters of a small open economy is growing. Moreover, the basis of modern economic relations within the global economy is not only the global trade in goods and services, but the international movement of production factors. Migration of labor resources starts playing an increasingly important role in the sphere of the international movement of production factors. The study of these processes and their further analysis is possible within the framework of the IS-LM-BP model supplemented by the labor market data. The IS-LM-BP model is still a significant theoretical and methodological development, which allows us to analyze the impact of exogenous shocks on the global and domestic markets of goods and money markets on a small open economy, as well as evaluate the effectiveness of state regulation. The opportunity to assess the impact of the exchange rate regime and the mobility of international capital on the effectiveness of state regulation in a small open economy, as well as on the mechanism for adjusting disturbed double equilibrium under the influence of exogenous shocks is considered to be the most interesting. However, the most important macroeconomic market – the labor market – remains outside the framework of this model. The purpose of the study is to modify the IS-LM-BP model developed in the framework of the concept of J.M. Keynes including a new curve – the full-employment curve in the model. The derivation of the curve is based on the theoretical premises of the neoclassical concept: full employment directly depends on the real interest rate in this model acts as an endogenous parameter. This study is based on Keynesian principles of double equilibrium in a small open economy supplemented by neoclassical ideas about full employment as an endogenous parameter. The modification of the IS-LM-BP model based on the principles of neoclassical synthesis means the development of a full-employment curve and including it in the case study model based on the basic principles of the theoretical justification of this macroeconomic model. The full-employment curve identifies the equilibrium curve in the neoclassical labor market. The reason for its inclusion in the IS-LM-BP model is the existing theoretically substantiated relationship between the real interest rate and the supply on the labor market as part of the concept of a new classical school. The dependence is based on the inter-temporal price of labor, which, in turn, is directly dependent on the real interest rate. Since the derivation of the full-employment curve is based on the neoclassical postulates of the functioning of the labor market, the suggested modification of the IS-LM-BP model can be considered as an example of neoclassical synthesis. The IS-LM-BP model modified by the author is proposed as a methodological base for the study of such theoretical and practical aspects of the functioning of open business systems as: 1) the analysis of the adjustment mechanism in the process of restoring disequilibrium in the labor market, goods, money and foreign exchange as a result of exposure to exogenous shocks; 2) the analysis of the effectiveness of state regulation in the functioning of the labor market, goods, money and foreign currency; 3) the comparison of the desired theoretical model with the real processes inherent in small open economies. Keywords IS-LM model, Mandell-Fleming model, IS-LM-BP model, real business cycle model, full-time curve, Keynesian concept, neoclassical synthesis, IS-LM-BP-NF model, exchange rate regime, capital mobility, small open economy.

Capital mobility in OECD countries: A multi-level factor approach to saving–investment correlations

While a high saving–investment correlation is one of the most robust empirical regularities in international economics, there has been debate about whether it can be interpreted as evidence of barriers to international capital flows. A high saving–investment association may be observed even in perfectly integrated international financial markets if saving and investment are shifted in the same direction due to a common third factor. Instead of focusing on specific common sources, we estimate factors that are (i) common across all countries and (ii) common within each country, using a multi-level factor model proposed by Choi et al. (2017). By controlling for multi-level factors in the saving–investment regression, we effectively isolate the impact of exogenously increased saving on investment regardless of the nature of common sources. We show that the global and country-specific factors together account for almost 50% of the saving–investment correlation in a panel of 19 OECD countries for 1961–2005, and capital mobility has increased over time particularly in Europe. Our analysis provides a measure of capital mobility which helps assess the effectiveness of policies or incidence of taxes in an open economy.

The Feldstein-Horioka puzzle and capital mobility: The role of the recent financial crisis

The Feldstein-Horioka (FH) puzzle has long been debated as it relates to the important topics of capital mobility and how to determine levels of investment. Adopting a recursive approach and panel techniques, this paper explores the impacts of the recent financial crisis on the validity of the puzzle. The OECD’s saving-investment correlation dropped to a record low just before the 2008 crisis began, reflecting the perceived ‘end’ of the FH puzzle in some studies. But since the onset of the crisis, our results indicate that this correlation has increased, suggesting the puzzle’s return. The puzzle for net capital-importing and net capital-exporting countries differs, with the relationship being more significant for the exporters compared to the importers, reflecting the asymmetry in terms of the degree of shocks across countries.

The Reall Explanation of the PPP Puzzle

This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalisation across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalisation across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high saving-investment correlations, and prevent real interest rates from being equalised across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from PPP (purchasing power parity) for extended periods of time and can therefore also explain the PPP puzzle. Thus, we are able to resolve 2 of Obstfeld and Rogoff’s (2000) “6 major puzzles in macroeconomics” with essentially the same explanation.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Rhetorics of saving–investment correlations and the international mobility of capital: A survey

ABSTRACTThis study surveys the literature on saving–investment (SI) correlations and international mobility of capital (IMC) generated over more than three decades since the 1980s. Several studies have shown the presence of paradoxically high SI correlations for the developed countries with observed high IMC, and low SI correlations for the developing countries with observed low IMC. The studies accounting for structural breaks in model parameters provide dominant support for the decrease in SI correlations and increase in IMC after the switch from fixed to flexible exchange rate regime and the removal of policy restrictions on capital flows. The intertemporal optimisation approach to current account and the open-economy growth and dynamic stochastic general equilibrium models mainly provide theoretical predictions and suggest that it is possible to find high SI correlations in the wake of high IMC. The increases in international capital flows have been the natural corollary of the growth of international trade in goods and services and increases in foreign direct investment flows. It is these factors, rather than international trade in capital market securities (bonds and equities) driven by the diversification benefits of financial portfolios per se, that have been the key levers of international financial flows.

Political Aspect of the Saving – Investment Gap in Croatia

<p>All the Governments of Croatia should acknowledge the importance of the economic policy<br />that will encourage higher saving rates thus enabling correlation with the investment rate with<br />the scope of reaching important macroeconomic goals, such as the GDP and employment<br />rates increase, etc., without in any way endangering the macroeconomic stability of the<br />national economy. Regardless of the great impact savings had on the investments, the<br />implementation of the economic or investment policy on behalf of the Right-wing<br />Government of Croatia had a great impact in creating the discrepancy in the<br />saving-investment ratio, than it was the case with the Left-wing Government of Croatia. If the<br />Right–wing Government of Croatia starts implementing the economic policy with the sole<br />scope of reaching higher saving rates than the former ones, complying with their ideology,<br />and focusing less on how to opportunistically reach middle voters, they will influence<br />effectively the saving and investment correlation, thus lessening the saving-investment gap<br />and reaching the macroeconomic stability. However, if the Right-wing Government<br />opportunistically turn to the “middle voters” instead of following their ideology`s programme,<br />this could lead to the decrease in efficiency of some economic policy measures with the goal<br />of reaching a certain saving-investment correlation. On the other hand, with the growth in<br />saving rates, Left-wing Government of Croatia can influence effectively its correlation with<br />the investment rates, but still in a lesser proportion compared to the Right–wing Government<br />of Croatia. With the Left–wing Government of Croatia opportunistically orienting on the<br />“middle voters” that would facilitate their position in achieving the macroeconomic stability<br />and thus enforcing their influence on the saving-investment correlation, as would not be the<br />case if only complying with their left oriented party`s programme.</p>

International Capital Mobility and Saving-Investment Nexus in Nigeria: Revisiting Feldstein-Horioka Hypothesis

This paper tests the validity of Feldstein-Horioka (1980) hypothesis using Nigerian data from 1980 to 2013 by relying on the ARDL Bounds testing approach to co-integration and vector error correction model (VECM). Evidence for the hypothesis over the sub-samples is mixed given absence of co-integrating relationship between savings and investment in both periods. Over the period of market-friendly economic reform (1986 -2013) and entire sample period (1980-2013), we found low saving investment correlation indicating support for the F-H hypothesis (that low saving investment relationship implies high degree of international capital mobility). Presumably, the World Bank and IMF designed economic reform programs in form of liberalization and deregulation – coupled with the neo-liberal economic management framework that Nigeria is currently practicing – may have attenuated the saving investment relation in the reform era, thereby providing support for F-H hypothesis over the reform era. But the finding of similar absence of cointegration between saving and investment in the pre-reform era, against the F-H postulate, reveals the importance of incorporating factors such as money supply and inflow of foreign capital that could affect the saving investment relationship as widely suggested in the literature. Overall, we find support for high degree of international capital mobility across Nigerian borders that may lead to unsustainable current account balance for the economy if left unregulated. The policy import of the paper is the need for a more conscientious implementation of a policy of guided deregulation of Nigeria’s capital and trade accounts.

Feldstein–Horioka puzzles

The high correlation between national saving and investment rates in advanced economies—the Feldstein–Horioka puzzle—has been referred to as the “mother of all puzzles.” Perhaps more puzzling is that for emerging economies saving–investment correlations tend to be significantly lower, though still positive. This deepens the Feldstein–Horioka puzzle because the mobility of capital is generally believed to be much lower in emerging economies than in advanced economies, and a country with less mobile capital should have a tighter relationship between local saving and investment rates. This paper develops a DSGE model that, without resorting to any real or financial friction, simultaneously explains these two aspects of the Feldstein–Horioka puzzle: positive saving–investment correlations in both advanced and emerging economies and significantly lower saving–investment correlations in emerging economies than in advanced economies. The main features of the model include long-run risk, an endogenous world interest rate, and cross-correlations of national and global shocks. The findings hold for both quarterly time series and long-run averages.

Regional Capital Mobility within Bulgaria

This paper investigates regional savings-investment correlation between 1999 and 2009 within the small and highly open economy of Bulgaria. Results confirm low correlation between regional savings and investment rates. Regional capital mobility has increased over time and openness has a positive effect on regional investment.

An Investigation of the Feldstein–Horioka Puzzle for the Association of Southeast Asian Nations Economies

AbstractThis article reviews the extensive literature on how to respond to the Feldstein–Horioka puzzle. This study quantitatively investigates the impact of instrumental variables on the correlation between domestic savings and investment. I consider two financial frictions: the economic system and the bank features. I find that the dynamic panel model with instrumental variables produces a savings–investment correlation and that information technology generates capital flows to ensure that countries have an incentive to develop. The findings emphasise the potential benefits associated with developing prospects and capital flow in an increasingly competitive emerging market.

Capital Mobility in Greece Before and After Financial Liberalization: A Counter-Argument

The note by Christopoulos re-examines the national savings-domestic investments correlation in Greece for the period 1960–2000. He applies the Johansen [Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 8, 231–254; Johansen, S. (1991). Estimation and hypothesis testing of cointegrating vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551–1580] econometric technique, and fails to find evidence for cointegration as Pelagidis and Mastroyiannis [Pelagidis, T., & Mastroyiannis, T. (2003). The saving–investment correlation in Greece, 1960–1997: Implications for capital mobility. Journal of Policy Modeling, 25, 609–616] did using the Jansen and Schultze [Jansen, W. J., & Schultze, G. G. (1993). Theory-based measurement on the saving–investment correlation with an application to Norway (Discussion Paper 205). Konstanz: Universitat Konstanz] methodology. We argue that the results are different not only due to the alternative methodology used but also because of differences in the period considered as well as of the data sources. As far as the main policy conclusions are concerned, we believe that even if one finds relatively stronger evidence of capital mobility, this cannot refute the desirability of encouraging national savings.

On China’s Domestic Capital Mobility and the Role of the Government: Empirical Evidence Over 1970–2006

AbstractThis article investigates capital mobility across 29 provinces in China for the period of 1970–2006 using the Feldstein–Horioka (FH) approach and Campbell and Mankiw’s consumption‐smoothing (CS) framework. It also examines the role of the governments in driving provincial capital mobility. If the provincial government investment is not properly separated out from the private investment, the FH framework applied to the overall saving and investment (private plus public) is found to underestimate the private saving–investment correlation and hence overstates the degree of private capital mobility compared with the CS framework that focuses on the private consumption and output. Both frameworks indicate strong correlation between private saving–investment and private consumption–output, implying strong barriers in the provincial private capital flows. However, there is ample evidence that capital mobility has been rising over time, particularly after the mid 1990s. It also appears that the government facilitates capital flows through inter‐governmental transfers during the sample period. The extent of provincial capital mobility sheds light on the ability of different provinces in diversifying idiosyncratic provincial risks. The earlier findings are robust to alternative measurements of variables and model specifications.

The Current Account And The Intertemporal Budget Constraint: Evidence From G-7 Countries

A random coefficients, error-correction model of saving-investment behaviour, which is consistent with intertemporal open-economy models, is estimated for G-7 countries to infer about the current account, capital mobility and the relevance of intertemporal budget constraints in such model. The error-correction mechanism is especially suited here since it is able to integrate short run dynamics with long run behaviour, while the random coefficients approach is a natural specification for accommodating inter-country differences. If saving-investment correlations measure capital mobility, a positive correlation would mean that a countrys growth prospects would be constrained by its saving, government deficits would crowd out private investment and, at a broader level, good investment opportunities might have to be foregone unless the required resources were obtained through a sacrifice in current consumption. On the other hand, those correlations could also be seen as validating the use of intertemporal budget constraints in open-economy models.

The Role of Remittences in the Explanation of Feldstein-Horioka Paradox: Evidence from Transition Economies

We measure the level of capital mobility following Feldstein and Horioka (1980) who assume that measuring the extent to which national saving and investment rates are correlated indicate the degree of financial integration into the world economy. While they surprisingly found the high positive correlation between saving and investment in developed OECD economies, subsequent empirical studies on the sample of less developed economies found smaller saving-investment correlation. Concentrating on the determinants of investments in the transition economies that could explain now conventional, puzzling Feldstein-Horioka results for transition economies, we were the first who consider remittances as possible explanation. The results of panel analysis seem to support the hypothesis of capital mobility among the economies in transition for the period 1995-2007. Highly significant effect of remittances on investment supports our argument that a significant portion of received remittances is directed toward investment in transition economies.