Working Paper: NBER ID: w0947
Authors: Martin Feldstein
Abstract: The evidence and analysis in this paper support the earlier findings of Feldstein and Horioka (1980) that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment. New estimates for the post-OPEC period 1974-79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 OECD countries. An explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long-run response of international capital flows than to their short-run behavior. Coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross-country sample of these averages. A portfolio model of international capital allocation that is presented in the paper indicates that the short-run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response.
Keywords: domestic saving; international capital movements; investment; OECD countries
JEL Codes: F21; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in domestic savings (D14) | Increase in domestic investment (E22) |
| Increase in domestic savings (D14) | Increase in net foreign investment (F21) |
| Increase in domestic savings (D14) | Increase in domestic investment (long-run) (E22) |
| Domestic savings (D14) | Domestic investment (E22) |