Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/206556
Authors: 
Levy, Daniel
Year of Publication: 
2004
Citation: 
[Editor:] Tsoukis, Christopher [Editor:] Agiomirgianakis, George M. [Editor:] Biswas, Tapan [Title:] Aspects of Globalisation: Macroeconomic and Capital Market Linkages in the Integrated World Economy [ISBN:] 978-1-4419-8881-2 [Year:] 2004 [Pages:] 49-66
Abstract: 
Using the framework of a dynamic intertemporal optimization model of an open economy, it is shown that the long-run investment-saving correlation follows directly from the economy’s dynamic budget constraint and this does not depend on the degree of international capital mobility. Therefore, unless the budget constraint is violated, the time series of investment and saving should be cointegrated, and this should be true for any degree of capital mobility. Using an improved econometric technique, which encompasses the tests used by previous authors and avoids some of the pitfalls associated with their tests, I show that their conflicting findings can be explained by a simple but important, omitted variables problem. Using annual and quarterly post-war U.S. data, I find that investment and saving are cointegrated in levels as well as in rates, regardless of the time period considered, as predicted by the model.
Subjects: 
Feldstein-Horioka Puzzle
Capital Mobility
Investment-Saving Correlation
Dynamic Budget Constraint
Integration and Cointegration
Omitted Variables
JEL: 
F21
F32
F02
F41
Published Version’s DOI: 
Document Type: 
Book Part
Document Version: 
Accepted Manuscript (Postprint)

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