Working Paper: CEPR ID: DP4610
Authors: Domenico Giannone; Michele Lenza
Abstract: This Paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment observed in OECD countries. We introduce a novel factor augmented panel regression to control for general equilibrium effects where global shocks are allowed to affect each country with specific magnitude and lag structure. We show that the homogeneity restriction on the propagation of global shocks across countries is rejected by the data and biases the saving-retention coefficient estimated in previous studies. By relaxing this assumption, the saving-retention coefficient remains high in the 70s but decreases considerably over time becoming very small in the last two decades. This finding is explained by the increased capital mobility in OECD countries.
Keywords: capital mobility; dynamic factor model; international comovement; saving correlation
JEL Codes: C23; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global shocks (F69) | Saving (E21) |
| Global shocks (F69) | Investment (G31) |
| Saving (E21) | World interest rates (E43) |
| World interest rates (E43) | World investment (F21) |
| Saving (E21) | Investment (G31) |
| Heterogeneous responses of countries to global shocks (F69) | Saving-retention coefficient (C29) |
| Previous studies' estimates (C51) | Saving-retention coefficient (C29) |