Working Paper: NBER ID: w11856
Authors: Martin Feldstein
Abstract: The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies over the past several decades, has important implications for tax and monetary policy. \nMore recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high. \n \nThis paper also examines the recent capital flows to the United States. The Treasury International Capital (TIC) reports are generally misunderstood. When they are properly interpreted, they do not indicate that they U.S. has an excess of capital flows to finance the current account deficit. The TIC data also cannot be relied on the distinguish private and government sources of the capital flow. The persistence of these flows is therefore uncertain. \nThe paper discusses the implications for monetary and fiscal policy of the changes in capital flows that may be happening.
Keywords: Monetary Policy; Capital Flows; Savings; Investment; Global Economy
JEL Codes: E0; F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic savings (D14) | Investment in OECD countries (F21) |
| Decline in savings retention coefficient (E21) | Effectiveness of U.S. monetary policy (E52) |
| Changes in capital flows (F32) | Effectiveness of U.S. monetary policy (E52) |
| Government sources financing current account deficit (F32) | Effectiveness of U.S. monetary policy (E52) |