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International capital mobility in OECD countries: The Feldstein–Horioka `puzzle' revisited
Economics Letters 59 (1998) 237–242
International capital mobility in OECD countries: The Feldstein–Horioka ‘puzzle’ revisited Khaled A. Hussein* Department of Economics, University of Kent at Canterbury, Canterbury, Kent CT2 7 NP, UK Received 3 September 1997; accepted 20 January 1998
Abstract We utilise the most recent time series techniques of dynamic OLS and examine international capital mobility across 23 OECD countries. We adopt the saving–investment approach where the endogeneity problem is confronted. Our findings show that capital has been remarkably mobile in most countries over the last three decades. 1998 Elsevier Science S.A. Keywords: Cointegration; Feldstein–Horioka puzzle; Saving–investment JEL classification: F32
1. Introduction Over the past two decades, industrial countries have experienced a continuing process of financial market deregulation and capital controls have been liberalised in many economies. By the 1980s, capital movements among major industrialised countries was thought to have reached a very high level (Frankel and MacArthur, 1988). To test the extent of international capital mobility, Feldstein and Horioka (1980) (FH hereafter) examined the correlation between national savings and investment across 16 OECD countries. They argued that with perfect capital mobility there should be no relation between a country’s domestic savings and its domestic investment. An increase in saving in any one country should add funds to the world capital market. These funds would then be shared among countries with favourable investment opportunities. Using cross-sectional analysis FH’s findings showed that 85–95% of national savings is domestically invested and the regression coefficient of savings on domestic investment is insignificantly different from unity. They concluded that the level of international capital mobility is very low and the high correlation between savings and investment has not weakened over time. In this paper, we provide empirical evidence against FH’s findings. Using the recently developed time series techniques of dynamic OLS, where the endogeneity of national savings and investment is taken into account, our findings show that capital is highly mobile in 18 OECD countries. We could only find support for FH’s findings in five cases out of 23. *Tel.: 144 1227 827655; fax: 144 1227 827850; e-mail: [email protected] 0165-1765 / 98 / $19.00 1998 Elsevier Science S.A. All rights reserved. PII: S0165-1765( 98 )00045-7
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
238
2. The saving–investment approach According to FH (1980), the saving–investment approach involves estimating the following equation: (I /Y) t 5 a 1 b (S /Y) t 1 ´t ,
(1)
where (I /Y) is the ratio of domestic investment to GDP, (S /Y) is the national saving ratio to GDP, and ´ is an error term. Even though numerous subsequent cross-section studies confirmed FH’s results (e.g., Feldstein, 1983; Dooley et al., 1987; Tesar, 1991), several economists have challenged their interpretation.1 Coakley and Kulasi (1997) interpret the cointegration of savings and investment with unit coefficient as an implication of the current account solvency and not capital immobility. Golub (1990) argues that b 51 cannot necessarily be interpreted as indicating low capital mobility. If country A witnessed large and offsetting capital flows in and out of the national borders, then b should be equal to one (see also Moosa, 1996). It is also argued that the high correlation of national savings and investment may be a result of a number of plausible macroeconomic factors. For instance, current-account targeting, if successful, would produce a strong saving–investment relationship, even with high capital mobility. Governments may react to a trade deficit, induced by an increase in investment, by raising taxes. The high correlations of saving–investment then has nothing to do with capital mobility (Westphal, 1983). Productivity shocks could also cause the co-movements in savings and investment. A productivity shock would increase investment as capital is more productive, and raise savings since wages are temporarily high (Obstfeld, 1986). Furthermore, Baxter and Crucini (1993) show that a highly positive correlation between savings and investment arises naturally within a quantitatively restricted equilibrium model. For these reasons empirical studies on the savings and investment relationship would suffer from a fundamental endogeneity problem unless the endogeneity is confronted.2 The endogeneity stems from the procyclical nature of both savings and investment.
3. Econometric issues The cross-section technique, utilised by FH and others, is subject to a number of limitations. Firstly, it is most likely to find a unity correlation between savings and investment when capital flows are mutually offset across the countries represented in the sample. Secondly, the long-term average of saving and investment rates may suggest a long-run relationship even when no correlation exists 1
Other tests of international capital mobility, using different approaches such as the international parity conditions approach and the consumption-smoothing current account framework, challenged FH’s conclusions (see, for example, Frankel and MacArthur, 1988; Ghosh, 1995). 2 Feldstein and Horioka (1980) tried to control for endogeneity by using the ratio of military expenditure to GNP and the dependency ratio as instrumental variables. Dooley et al. (1987) argued that it is possible that both instruments are endogenous.
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
239
(Sinn, 1992).3 Thirdly, the cross-section analysis may be subject to sample selection bias 4 (see also Demetriades and Hussein, 1996). Here, we use the most recent time series procedure of the dynamic OLS (DOLS), avoiding the criticisms of earlier studies, especially the endogeneity problem between savings and investment. Following Saikkonen, 1991, Stock and Watson, 1993 and Inder, 1995 the inclusion of lags and leads of the first difference of savings in DOLS eliminates the effect of the endogeneity, while the lags of the first difference of investment corrects for the impact of the remaining autocorrelation of the residual term. In line with FH (1980), we estimate the following equation: (I /Y) t 5 a 1 b (S /Y) t 1 A(L)D(S /Y) t2k 1 B(L)D(S /Y) t1k 1 A(L)D(I /Y) t2k 1 u t ,
(2)
where A(L) is the polynomial lag operator, B(L) is the polynomial lead operator, and k is the number of lags and leads. Here, k is equal to two. By estimating Eq. (2), it is possible to construct asymptotically valid test statistics and also to estimate the long-run relationship where the coefficient of (S /Y) t is the cointegrating parameter and its statistical significance can be tested by Wald test. The 5 estimated cointegrating vector is then tested for stationarity. DOLS is preferable to other econometric techniques for single equation models since the DOLS procedure overcomes the common problems of the static OLS. The static OLS finite sample estimates of long-run relationships are potentially biased and inferences cannot be drawn using t-statistics (Banerjee et al., 1986; Kremers et al., 1992). Our sample includes 23 OECD countries where we use annual data and the sample period extends from 1960 to 1993. The main data source is the World Bank, World Development Indicators (on CD-ROM).
4. Results We start our analysis by examining the order of integration of the variables of interest. We apply the augmented Dickey and Fuller (1981) test 6 (ADF) and the Phillips and Perron (1988) test (PP) to examine the existence of unit roots. The estimated results of the unit root tests indicate that the two variables are most likely I(1) for all countries as the null hypothesis of non-stationarity cannot be rejected at the 5% level of significance unless the first difference is taken.7 In order to examine the impact of the financial deregulation on the coefficient of savings and investment, we test the long-run relationship between S /Y and I /Y over two periods (1960–93 and 3
Sinn (1992) points out that the intertemporal approach to the balance of payments implies the current account balance moves over time from deficits to surpluses in order to meet the intertemporal budget constraint of the country. In this case, averages of annual data will show that savings and investment are more similar than their annual observations. 4 For example, in the study of Tesar (1991) when Luxembourg is excluded from the sample, the findings change dramatically, as the correlation between savings and investment increased from 0.35 to 0.84. Dooley et al. (1987) find that the correlation of savings and investment is higher for the industrial countries than for the developing countries. 5 Here, we use the standard augmented Dickey and Fuller (1981) test to examine the stationarity of the estimated long-run relationship. 6 The Schwarz Bayesian criterion is used to select the order of the ADF regression. 7 The results of the unit root test are available from the author upon request.
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
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Table 1 The long-run relationship between national savings and investment 1960–1993 Australia Austria Belgium Canada Denmark Finland France Germany Greece Iceland Ireland Italy Japan Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA
1970–1993 2
b
ADF
x
1.37 (41.21) 1.04 (34.19) 0.49 (4.22) 0.79 (5.68) 0.41 (2.39) 0.81 (7.70) 1.02 (41.60) 20.12 (20.68) 1.95 (7.66) 0.91 (22.45) 1.55 (10.10) 1.05 (44.49) 1.49 (9.58) 0.36 (34.10) 0.76 (34.10) 1.31 (19.74) 0.29 (1.80) 1.24 (10.94) 1.04 (22.51) 0.79 (9.73) 0.71 (27.24) 1.02 (21.42) 0.87 (9.77)
22.91
122.01 [0.00] 1.52 [0.22] 19.54 [0.00] 2.24 [0.13] 11.36 [0.00] 3.29 [0.07] 1.26 [0.26] 41.92 [0.00] 13.91 [0.00] 0.004 [0.98] 10.29 [0.00] 5.34 [0.02] 9.91 [0.00] 865.7 [0.00] 116.4 [0.00] 22.24 [0.00] 19.06 [0.00] 4.57 [0.03] 0.75 [0.39] 6.94 [0.01] 121.38 [0.00] 0.21 [0.65] 1.54 [0.22]
23.06 25.82 24.02 24.37 24.60 25.50 22.89 23.39 25.63 22.19 25.23 23.84 23.30 24.53 25.73 24.06 22.89 25.30 23.61 26.20 22.68 24.58
b
ADF
x2
1.44 (40.27) 1.01 (25.23) 0.46 (3.36) 0.53 (3.09) 0.24 (0.91) 0.61 (3.94) 1.02 (32.94) 20.28 (21.34) 1.72 (9.25) 0.91 (18.35) 1.48 (7.02) 1.06 (35.81) 1.49 (5.73) 0.35 (12.60) 0.73 (19.84) 1.32 (16.06) 20.02 (20.08) 1.12 (9.11) 0.89 (8.82) 0.62 (5.12) 0.71 (18.21) 1.03 (15.70) 0.80 (8.56)
22.91
149.64 [0.00] 0.05 [0.82] 15.73 [0.00] 7.31 [0.01] 8.58 [0.00] 6.27 [0.01] 0.76 [0.39] 37.05 [0.00] 15.08 [0.00] 0.003 [0.99] 6.82 [0.01] 3.66 [0.06] 3.55 [0.06] 532.5 [0.00] 51.70 [0.00] 15.26 [0.00] 17.64 [0.00] 1.00 [0.32] 1.28 [0.26] 9.69 [0.00] 54.13 [0.00] 0.16 [0.69] 4.69 [0.03]
22.36 26.05 23.72 25.03 24.91 24.45 23.97 22.96 24.80 22.74 24.33 23.18 22.68 23.99 25.03 23.57 23.44 24.92 23.64 25.23 22.31 25.37
Notes: 1. DOLS equations include two lags and leads of D(S /Y) and two lags of D(I /Y). 2. Time trend is only retained when it was significant. 3. t-Statistics are in parentheses and P-values are in brackets. 4. Wald test, which is distributed as chi-squares, is used to test the hypothesis that b 51. 5. The ADF critical values are 22.63 and 23.00 at the 10% and 5% levels of significance, respectively.
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1970–93). If b is equal to one in both time periods (1960–93 and 1970–93), we conclude that the regression coefficient between national savings and investment is equal to unity. Using DOLS, Table 1 reports that the estimated cointegrating vector between national savings and investment is stationary in all OECD countries.8 The ADF statistics fail to reject the hypothesis of cointegration in three cases, Austria and the UK over the period 1970–1993 and Ireland for the period 1960–1993. In contrast to FH’s findings, the hypothesis of capital immobility, unity correlation between S /Y and I /Y, is rejected at the 5% level of significance in 18 countries. In other words, the regression coefficient between national savings and investment is equal to unity in only five countries (Austria, France, Iceland, Spain, UK). One possible explanation is that there could be offsetting inflows and outflows of capital in these five cases. Capital outflow exceeds capital inflow in 10 countries where b is smaller than unity. Among these 10 countries net capital outflow is substantial in Belgium, Denmark, Luxembourg, and Norway where b is smaller than 0.46. In Canada, Finland, and Sweden net capital outflow is moderate where the regression coefficient does not exceed 0.62. There is clear evidence of capital inflow in seven OECD countries, Australia, Greece, Ireland, Italy, Japan, New Zealand, and Portugal, where b is greater than 1. In Germany, the relationship between S /Y and I /Y is insignificant over the two periods. Comparing the value of b over the two periods in each country, there is evidence that capital flows witnessed a moderate change in Canada, Denmark, Finland, Greece, and Sweden where the change of b is around 0.20 over the two periods. In most cases, the change of b is small.
5. Conclusion Our findings show that when the endogeneity of savings is taken into account, the association between national savings and investment is far from unity in 18 out of 23 OECD countries. Furthermore, there has been a moderate change in capital movement in five OECD countries over the last two decades.
Acknowledgements ˜ Faria, Luiz de Mello, Imad Moosa, Tony Thirlwall, and an I would like to thank Alan Carruth, Joao anonymous referee for helpful discussions and comments.
References Banerjee, A., Hendry, D., Smith, G., 1986. Exploring equilibrium relationships in econometrics through static models: Some Monte Carlo evidence. Oxford Bulletin of Economics and Statistics 52, 92–104. Baxter, M., Crucini, M., 1993. Explaining saving–investment correlations. American Economic Review 83, 416–436. 8
Using different cointegration procedures, Coakley and Kulasi (1997) find that saving and investment cointegrate across all 11 countries in their study.
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Coakley, J., Kulasi, F., 1997. Cointegration of long span saving and investment. Economics Letters 54, 1–6. Demetriades, P., Hussein, K., 1996. Does financial development cause economic growth? Time series evidence from 16 countries. Journal of Development Economics 51, 387–411. Dickey, D., Fuller, W., 1981. Distribution of the estimators for autoregressive time series with a unit root. Econometrica 49, 1057–1072. Dooley, M., Frankel, J., Mathieson, D., 1987. International capital mobility: What do saving–investment correlations tell us?. IMF Staff Papers 34, 503–530. Feldstein, M., 1983. Domestic saving and international capital movements in the long run and in the short run. European Economic Review 21, 139–151. Feldstein, M., Horioka, C., 1980. Domestic saving and international capital flows. Economic Journal 90, 314–329. Frankel, J., MacArthur, A., 1988. Political vs currency premia in international real interest differentials: A study of forward rates for 24 countries. European Economic Review 32, 1083–1121. Ghosh, A., 1995. International capital mobility amongst the major industrialised countries: Too little or too much. Economic Journal 105, 107–128. Golub, S., 1990. International capital mobility: Net versus gross stocks and flows. Journal of International Money and Finance 9, 424–439. Inder, B., 1995. Finite sample arguments for appropriate estimation of cointegrating vectors. Department of Economics, Monash University, mimeo. Kremers, J., Ericsson, N., Dolado, J., 1992. The power of cointegration tests. Oxford Bulletin of Economics and Statistics 54, 325–349. Moosa, I., 1996. A note on capital mobility. Southern Economic Journal 63 (1), 248–254. Obstfeld, M., 1986. Capital mobility in the world economy: Theory and measurement. Carnegie-Rochester Conference Series on Public Policy 31, 1–24. Phillips, P., Perron, P., 1988. Testing for a unit root in time series. Biometrika 75, 335–346. Saikkonen, P., 1991. Asymptotically efficient estimation of cointegrating regressions. Econometric Theory 7, 1–21. Sinn, S., 1992. Saving–investment correlations and capital mobility: On the evidence from annual data. Economic Journal 102, 1162–1170. Stock, J., Watson, M., 1993. A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica 61, 783–820. Tesar, L., 1991. Savings, investment, and international capital flows. Journal of International Economics 31, 55–78. Westphal, U., 1983. Comments on ‘Domestic saving and international capital flows in the long run and the short run’ by M. Feldstein. European Economic Review 21, 157–159.
International capital mobility in OECD countries: The Feldstein–Horioka ‘puzzle’ revisited Khaled A. Hussein* Department of Economics, University of Kent at Canterbury, Canterbury, Kent CT2 7 NP, UK Received 3 September 1997; accepted 20 January 1998
Abstract We utilise the most recent time series techniques of dynamic OLS and examine international capital mobility across 23 OECD countries. We adopt the saving–investment approach where the endogeneity problem is confronted. Our findings show that capital has been remarkably mobile in most countries over the last three decades. 1998 Elsevier Science S.A. Keywords: Cointegration; Feldstein–Horioka puzzle; Saving–investment JEL classification: F32
1. Introduction Over the past two decades, industrial countries have experienced a continuing process of financial market deregulation and capital controls have been liberalised in many economies. By the 1980s, capital movements among major industrialised countries was thought to have reached a very high level (Frankel and MacArthur, 1988). To test the extent of international capital mobility, Feldstein and Horioka (1980) (FH hereafter) examined the correlation between national savings and investment across 16 OECD countries. They argued that with perfect capital mobility there should be no relation between a country’s domestic savings and its domestic investment. An increase in saving in any one country should add funds to the world capital market. These funds would then be shared among countries with favourable investment opportunities. Using cross-sectional analysis FH’s findings showed that 85–95% of national savings is domestically invested and the regression coefficient of savings on domestic investment is insignificantly different from unity. They concluded that the level of international capital mobility is very low and the high correlation between savings and investment has not weakened over time. In this paper, we provide empirical evidence against FH’s findings. Using the recently developed time series techniques of dynamic OLS, where the endogeneity of national savings and investment is taken into account, our findings show that capital is highly mobile in 18 OECD countries. We could only find support for FH’s findings in five cases out of 23. *Tel.: 144 1227 827655; fax: 144 1227 827850; e-mail: [email protected] 0165-1765 / 98 / $19.00 1998 Elsevier Science S.A. All rights reserved. PII: S0165-1765( 98 )00045-7
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
238
2. The saving–investment approach According to FH (1980), the saving–investment approach involves estimating the following equation: (I /Y) t 5 a 1 b (S /Y) t 1 ´t ,
(1)
where (I /Y) is the ratio of domestic investment to GDP, (S /Y) is the national saving ratio to GDP, and ´ is an error term. Even though numerous subsequent cross-section studies confirmed FH’s results (e.g., Feldstein, 1983; Dooley et al., 1987; Tesar, 1991), several economists have challenged their interpretation.1 Coakley and Kulasi (1997) interpret the cointegration of savings and investment with unit coefficient as an implication of the current account solvency and not capital immobility. Golub (1990) argues that b 51 cannot necessarily be interpreted as indicating low capital mobility. If country A witnessed large and offsetting capital flows in and out of the national borders, then b should be equal to one (see also Moosa, 1996). It is also argued that the high correlation of national savings and investment may be a result of a number of plausible macroeconomic factors. For instance, current-account targeting, if successful, would produce a strong saving–investment relationship, even with high capital mobility. Governments may react to a trade deficit, induced by an increase in investment, by raising taxes. The high correlations of saving–investment then has nothing to do with capital mobility (Westphal, 1983). Productivity shocks could also cause the co-movements in savings and investment. A productivity shock would increase investment as capital is more productive, and raise savings since wages are temporarily high (Obstfeld, 1986). Furthermore, Baxter and Crucini (1993) show that a highly positive correlation between savings and investment arises naturally within a quantitatively restricted equilibrium model. For these reasons empirical studies on the savings and investment relationship would suffer from a fundamental endogeneity problem unless the endogeneity is confronted.2 The endogeneity stems from the procyclical nature of both savings and investment.
3. Econometric issues The cross-section technique, utilised by FH and others, is subject to a number of limitations. Firstly, it is most likely to find a unity correlation between savings and investment when capital flows are mutually offset across the countries represented in the sample. Secondly, the long-term average of saving and investment rates may suggest a long-run relationship even when no correlation exists 1
Other tests of international capital mobility, using different approaches such as the international parity conditions approach and the consumption-smoothing current account framework, challenged FH’s conclusions (see, for example, Frankel and MacArthur, 1988; Ghosh, 1995). 2 Feldstein and Horioka (1980) tried to control for endogeneity by using the ratio of military expenditure to GNP and the dependency ratio as instrumental variables. Dooley et al. (1987) argued that it is possible that both instruments are endogenous.
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
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(Sinn, 1992).3 Thirdly, the cross-section analysis may be subject to sample selection bias 4 (see also Demetriades and Hussein, 1996). Here, we use the most recent time series procedure of the dynamic OLS (DOLS), avoiding the criticisms of earlier studies, especially the endogeneity problem between savings and investment. Following Saikkonen, 1991, Stock and Watson, 1993 and Inder, 1995 the inclusion of lags and leads of the first difference of savings in DOLS eliminates the effect of the endogeneity, while the lags of the first difference of investment corrects for the impact of the remaining autocorrelation of the residual term. In line with FH (1980), we estimate the following equation: (I /Y) t 5 a 1 b (S /Y) t 1 A(L)D(S /Y) t2k 1 B(L)D(S /Y) t1k 1 A(L)D(I /Y) t2k 1 u t ,
(2)
where A(L) is the polynomial lag operator, B(L) is the polynomial lead operator, and k is the number of lags and leads. Here, k is equal to two. By estimating Eq. (2), it is possible to construct asymptotically valid test statistics and also to estimate the long-run relationship where the coefficient of (S /Y) t is the cointegrating parameter and its statistical significance can be tested by Wald test. The 5 estimated cointegrating vector is then tested for stationarity. DOLS is preferable to other econometric techniques for single equation models since the DOLS procedure overcomes the common problems of the static OLS. The static OLS finite sample estimates of long-run relationships are potentially biased and inferences cannot be drawn using t-statistics (Banerjee et al., 1986; Kremers et al., 1992). Our sample includes 23 OECD countries where we use annual data and the sample period extends from 1960 to 1993. The main data source is the World Bank, World Development Indicators (on CD-ROM).
4. Results We start our analysis by examining the order of integration of the variables of interest. We apply the augmented Dickey and Fuller (1981) test 6 (ADF) and the Phillips and Perron (1988) test (PP) to examine the existence of unit roots. The estimated results of the unit root tests indicate that the two variables are most likely I(1) for all countries as the null hypothesis of non-stationarity cannot be rejected at the 5% level of significance unless the first difference is taken.7 In order to examine the impact of the financial deregulation on the coefficient of savings and investment, we test the long-run relationship between S /Y and I /Y over two periods (1960–93 and 3
Sinn (1992) points out that the intertemporal approach to the balance of payments implies the current account balance moves over time from deficits to surpluses in order to meet the intertemporal budget constraint of the country. In this case, averages of annual data will show that savings and investment are more similar than their annual observations. 4 For example, in the study of Tesar (1991) when Luxembourg is excluded from the sample, the findings change dramatically, as the correlation between savings and investment increased from 0.35 to 0.84. Dooley et al. (1987) find that the correlation of savings and investment is higher for the industrial countries than for the developing countries. 5 Here, we use the standard augmented Dickey and Fuller (1981) test to examine the stationarity of the estimated long-run relationship. 6 The Schwarz Bayesian criterion is used to select the order of the ADF regression. 7 The results of the unit root test are available from the author upon request.
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
240
Table 1 The long-run relationship between national savings and investment 1960–1993 Australia Austria Belgium Canada Denmark Finland France Germany Greece Iceland Ireland Italy Japan Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA
1970–1993 2
b
ADF
x
1.37 (41.21) 1.04 (34.19) 0.49 (4.22) 0.79 (5.68) 0.41 (2.39) 0.81 (7.70) 1.02 (41.60) 20.12 (20.68) 1.95 (7.66) 0.91 (22.45) 1.55 (10.10) 1.05 (44.49) 1.49 (9.58) 0.36 (34.10) 0.76 (34.10) 1.31 (19.74) 0.29 (1.80) 1.24 (10.94) 1.04 (22.51) 0.79 (9.73) 0.71 (27.24) 1.02 (21.42) 0.87 (9.77)
22.91
122.01 [0.00] 1.52 [0.22] 19.54 [0.00] 2.24 [0.13] 11.36 [0.00] 3.29 [0.07] 1.26 [0.26] 41.92 [0.00] 13.91 [0.00] 0.004 [0.98] 10.29 [0.00] 5.34 [0.02] 9.91 [0.00] 865.7 [0.00] 116.4 [0.00] 22.24 [0.00] 19.06 [0.00] 4.57 [0.03] 0.75 [0.39] 6.94 [0.01] 121.38 [0.00] 0.21 [0.65] 1.54 [0.22]
23.06 25.82 24.02 24.37 24.60 25.50 22.89 23.39 25.63 22.19 25.23 23.84 23.30 24.53 25.73 24.06 22.89 25.30 23.61 26.20 22.68 24.58
b
ADF
x2
1.44 (40.27) 1.01 (25.23) 0.46 (3.36) 0.53 (3.09) 0.24 (0.91) 0.61 (3.94) 1.02 (32.94) 20.28 (21.34) 1.72 (9.25) 0.91 (18.35) 1.48 (7.02) 1.06 (35.81) 1.49 (5.73) 0.35 (12.60) 0.73 (19.84) 1.32 (16.06) 20.02 (20.08) 1.12 (9.11) 0.89 (8.82) 0.62 (5.12) 0.71 (18.21) 1.03 (15.70) 0.80 (8.56)
22.91
149.64 [0.00] 0.05 [0.82] 15.73 [0.00] 7.31 [0.01] 8.58 [0.00] 6.27 [0.01] 0.76 [0.39] 37.05 [0.00] 15.08 [0.00] 0.003 [0.99] 6.82 [0.01] 3.66 [0.06] 3.55 [0.06] 532.5 [0.00] 51.70 [0.00] 15.26 [0.00] 17.64 [0.00] 1.00 [0.32] 1.28 [0.26] 9.69 [0.00] 54.13 [0.00] 0.16 [0.69] 4.69 [0.03]
22.36 26.05 23.72 25.03 24.91 24.45 23.97 22.96 24.80 22.74 24.33 23.18 22.68 23.99 25.03 23.57 23.44 24.92 23.64 25.23 22.31 25.37
Notes: 1. DOLS equations include two lags and leads of D(S /Y) and two lags of D(I /Y). 2. Time trend is only retained when it was significant. 3. t-Statistics are in parentheses and P-values are in brackets. 4. Wald test, which is distributed as chi-squares, is used to test the hypothesis that b 51. 5. The ADF critical values are 22.63 and 23.00 at the 10% and 5% levels of significance, respectively.
K. A. Hussein / Economics Letters 59 (1998) 237 – 242
241
1970–93). If b is equal to one in both time periods (1960–93 and 1970–93), we conclude that the regression coefficient between national savings and investment is equal to unity. Using DOLS, Table 1 reports that the estimated cointegrating vector between national savings and investment is stationary in all OECD countries.8 The ADF statistics fail to reject the hypothesis of cointegration in three cases, Austria and the UK over the period 1970–1993 and Ireland for the period 1960–1993. In contrast to FH’s findings, the hypothesis of capital immobility, unity correlation between S /Y and I /Y, is rejected at the 5% level of significance in 18 countries. In other words, the regression coefficient between national savings and investment is equal to unity in only five countries (Austria, France, Iceland, Spain, UK). One possible explanation is that there could be offsetting inflows and outflows of capital in these five cases. Capital outflow exceeds capital inflow in 10 countries where b is smaller than unity. Among these 10 countries net capital outflow is substantial in Belgium, Denmark, Luxembourg, and Norway where b is smaller than 0.46. In Canada, Finland, and Sweden net capital outflow is moderate where the regression coefficient does not exceed 0.62. There is clear evidence of capital inflow in seven OECD countries, Australia, Greece, Ireland, Italy, Japan, New Zealand, and Portugal, where b is greater than 1. In Germany, the relationship between S /Y and I /Y is insignificant over the two periods. Comparing the value of b over the two periods in each country, there is evidence that capital flows witnessed a moderate change in Canada, Denmark, Finland, Greece, and Sweden where the change of b is around 0.20 over the two periods. In most cases, the change of b is small.
5. Conclusion Our findings show that when the endogeneity of savings is taken into account, the association between national savings and investment is far from unity in 18 out of 23 OECD countries. Furthermore, there has been a moderate change in capital movement in five OECD countries over the last two decades.
Acknowledgements ˜ Faria, Luiz de Mello, Imad Moosa, Tony Thirlwall, and an I would like to thank Alan Carruth, Joao anonymous referee for helpful discussions and comments.
References Banerjee, A., Hendry, D., Smith, G., 1986. Exploring equilibrium relationships in econometrics through static models: Some Monte Carlo evidence. Oxford Bulletin of Economics and Statistics 52, 92–104. Baxter, M., Crucini, M., 1993. Explaining saving–investment correlations. American Economic Review 83, 416–436. 8
Using different cointegration procedures, Coakley and Kulasi (1997) find that saving and investment cointegrate across all 11 countries in their study.
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