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The saving–investment correlation in Greece, 1960–1997: implications for capital mobility
Journal of Policy Modeling 25 (2003) 609–616
The saving–investment correlation in Greece, 1960–1997: implications for capital mobility Theodore Pelagidis∗ , Tasos Mastroyiannis Department of International and European Studies, Panteion University of Athens, 136 Sygrou Avenue, Athens GR-17671, Greece Received 31 December 2001; received in revised form 28 August 2002; accepted 10 September 2002
Abstract In this note, the national saving–domestic investment correlation is examined in terms of an error correction model to gain some insight into the degree of capital mobility, using Greek data for the period 1960–1997. In particular, we employ cointegration analysis with an emphasis on the error correction process of the time series on annual data for Greece. Our work follows the study of Bajo-Rubio [Appl. Econ. Lett. 5 (1998) 769] that deals with the case of Spain. However, we use a longer time period, which enable us to examine with more preciseness the saving–investment relationship in Greece and its implications for capital mobility. The results show that Greek domestic investments and national savings during 1960–1997 are to a great extent cointegrated and that a significant long-run relationship exists. © 2003 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. JEL classification: F41; Macro focus Keywords: Saving; Investment; Globalization
1. Introduction There is a consensus among professional economists that full capital mobility increases welfare by allowing efficient allocation of factors of production. Welfare results are indeed optimized in case allocation is taking place at a global level. The argument is, beyond any doubt, sound and true. However, perceptions in the ∗
Corresponding author. Tel.: +30-10-7216033; fax: +30-10-9218427. E-mail address: [email protected] (T. Pelagidis).
0161-8938/$ – see front matter © 2003 Society for Policy Modeling. doi:10.1016/S0161-8938(03)00053-X
610
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
literature about the extent and importance of global capital integration in the last 20 years vary, depending on how global capital mobility is measured. The established academic consensus about the degree of global capital markets integration has been even more destabilized since the appearance of the seminal paper by Feldstein and Horioka (1980) on the S–I correlation. The Feldstein–Horioka (F–H) puzzle, that a close relationship between national savings and domestic investments constitutes a stable regularity in the OECD countries, continues to challenge economic orthodoxy as the majority of related tests continue showing a saving–investment retention coefficient that lies quite far from zero.1 Despite objections concerning F–H tests robustness, the puzzle still remains a stylized fact as related studies and tests confirm more or less a strong “home bias” in capital markets and, so, research efforts to solve the puzzle are still of high priority (Rodrik, 2000).2 Such efforts have been recently focused on indirect ways to explain the puzzle by introducing imperfect goods market integration (Obstfeld & Rogoff, 2000). We believe that imperfections even if they could be found in goods market, should be less globally homogeneous and so have to be investigated at a national level. Applying various tests country by country could help not only to examine whether — and how much — a single country is financially integrated into the global economy. It could also help us to find out whether F–H tests continue to be valid. It is reminded that the overestimation and sometimes the misunderstanding of the extent of financial globalization could lead individual countries to unsuitable policy responses with catastrophic results. Thus, to measure capital mobility and a country’s integration to global capital markets is of cardinal importance for policy prescriptions as well. In this context, the very first issue needs clarification is whether financial globalization has really gone far for each country. In this note we reassess the relative importance of national economic ties in the case of Greece. The note measures the evolution of the financial integration of the Greek economy during the period 1960–1997. We employ cointegration analysis with an emphasis on the error correction process of the time series on annual data for Greece for the period 1960–1997. Our work follows the study of Bajo-Rubio (1998) that deals with the case of Spain. However, we use a longer time period, which enable us to examine with more preciseness the saving–investment relationship in Greece. In the last section we focus on the policy implications of the findings. We give emphasis to policy guidelines especially in the context of Greece’s efforts to keep up with the EMU requirements. 1
See Coakley, Kulasi, and Smith (1998) for an excellent survey. Such as “endogeneity” or efforts to prove that even a high retention coefficient does not necessarily mean that world capital mobility is imperfect. Also, Alexakis and Apergis (1994), using the methodology of cointegration — in the context of a general equilibrium optimization model capable of generating artificial model data of savings and investment — find no link between savings and investment, supporting the case of highly integrated capital markets. 2
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
611
2. On the F–H puzzle Investigating the saving–investment relationship, Feldstein and Horioka (1980) regressed the Investment/GDP ratio to the Saving/GDP ratio using the equation: S I i=␣+ i + ui Y Y where  is the saving–investment retention coefficient and ui is the standard error. The equation represents an indirect way to test the full capital mobility hypothesis as it measures the share of domestic investment financed by foreign capital. In other words,  reveals the extent to which an incremental change in national saving remains home and finances domestic investment. In this context,  is expected to be around 0 in case of full capital mobility as incremental national saving is expected to move globally to require the highest profitability. On the other hand, each individual country is expected to finance domestic investment by a global capital pool. Using cross section data for 23 industrial countries, Feldstein and Horioka (1980) investigated the saving–investment relationship for the period 1960–1974 and found that the retention coefficient () is around 0.85–0.95, that is for every unit change in national saving, domestic investment changes 85–95% as well. That means that domestic investment continues to be basically determined by national saving and, thus, cross border capital mobility remains limited. Their results confirmed by Feldstein (1983) and Feldstein and Bacchetta (1989), extending the period up to the mid 1980s. Frankel (1989) and Tesar (1991), despite econometric in nature objections, accepted that  for the aforementioned periods is much closer to 1 than to 0 and in any case continues to be very high during the 1980s in most of the countries. Wong (1990), Tesar (1991), Obstfeld (1995), and Coakley et al. (1998), argue that in cases such as in the US, where since the 1980s foreign investment massively entered the country,  should be much lower.3 That is why we insist that detailed case studies are needed today both to test for F–H robustness and to investigate the degree of capital mobility. In this context, we focus below on the Greek case. 3. Econometric analysis and empirical results Within the framework of time series analysis, we use the cointegration approach to examine the magnitude as well as the stability of the saving retention coefficient for Greece. A number of studies have used time series analysis (Miller, 1988; Leachman, 1991; Vikoren, 1994; Jansen and Schulze, 1993; Bajo-Rubio, 1998).4 3 Obstfeld and Rogoff (2000), have recently estimated that  = 0.60 for the OECD countries (1960–1997, average). Also, for the same period, US NS/Y = 0.15 and I/Y = 0.17 (same period). 4 For a survey of the various econometric approaches to the F–H puzzle see Coakley et al. (1998) and Tesar (1991).
612
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
Fig. 1. Saving and investment rates in Greece 1960–1997. Table 1 Dickey–Fuller unit root test yt = c + ␥c t + c yt−1 + ε yt = b + yt−1 + ε yt = ␣ yt−1 + ε
(1) (2) (3) S
I
(A) Levels c ␣
−1.77 −1.26 −0.42
−2.26 −1.71 −0.31
(B) First difference c ␣
−5.37∗ −5.36∗ −5.42∗
−6.26∗ −6.16∗ −6.25∗
MacKinnon critical values for rejection of the null of unit root are used. Asterisks (∗, ∗∗, ∗∗∗) denote significance levels at 1, 5, and 10% correspondingly.
We follow the work of Jansen and Schulze (1993), and use error correction model to examine the saving investment correlation. Our analysis is based on annual data on gross national savings rate (S) and gross domestic investment rate (I) (both are expressed as a percentage to GDP). The source of the data is the Ministry of National Economy of Greece.5 Fig. 1 plots both series. The time series properties of the series are examined using the Dickey–Fuller unit root tests. Results are presented in Table 1. Both series appear to be integrated of order one (1). We examine the saving investment correlations using the following equation: It = aECM + bECM St + cECM (St−1 − It−1 ) + d ECM St−1 + εt
(4)
5 Hellenic Democracy, The Ministry of National Economy, The Greek Economy: 1960–1997, Semi–annual report, Athens, 1998, Table 6.
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
613
Fig. 2. Recursive estimates of the short run coefficient bECM .
The coefficient bECM measures the short run response of investment to a unit change of savings. Significant non-zero values for the coefficient cECM indicate that saving and investment rates are cointegrated, and in addition provide an estimate for the speed of adjustment of investment to the previous period’s deviation from the long-run equilibrium. If the coefficient d ECM = 0, the current account is stationary around some constant, and if aECM = d ECM = 0, it is zero. The regression results are as follows (t-statistics in italics): It = 4.63 + 0.91St + 0.69(St−1 − It−1 ) − 0.14St−1 + εt 3.71
11.54
4.45
−3.18
R = 0.80, = 1.18, DW = 1.83, BG(1) = 0.35, BG(2) 2
= 1.39, ARCH(1) = 1.32, JB = 0.3
(5)
All estimates are significantly different from zero. The results indicate that (a) the variables are co-integrated, (b) there is significant short run correlation between saving and investment, and (c) there is a deficit in the current account in the long run. The diagnostic tests indicate that Eq. (5) is well specified. Furthermore, the
614
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
coefficient has a tendency to decrease over time as is shown by its recursive estimate in Fig. 2. To examine the possibility that the coefficient of S changes over time, we re-estimate Eq. (4) by allowing its coefficient to vary among different sample periods. We use three sample periods: 1960–1973, 1974–1981, and 1982–1997.6 The estimated equation becomes: It = 4.36 + 1.17D1 × St + 0.94D2 × St + 0.71D3 × St 3.38
6.68
7.93
5.6
+ 0.61(S t−1 − I t−1 ) − 0.14St−1 + εt 3.82
−3.1
R = 0.82, = 1.13, DW = 1.92, BG(1) = 0.003, BG(2) 2
= 1.50, ARCH(1) = 0.7, JB = 0.38
(6)
The coefficient of S is significantly different from zero for all sub-periods. Furthermore and most importantly, the coefficient of S is progressively reduced. All diagnostic tests are passed.
4. Policy implications and concluding remarks As far as policy implications are concerned, since increases or decreases in domestic investments seem to be followed by simultaneous increases in national savings, the role of national savings is of cardinal importance for domestic investments in Greece. Policy implications are the followings: First, by affecting national savings, the Greek government can also influence the level of domestic capital formation. As a consequence, higher levels of domestic investments can primarily and mainly be financed by higher national savings. Second, as national savings are, to a large extent, negatively affected by budget deficits and as capital inflows and foreign direct investments in particular remain anemic, the Greek government has to be cautious not to crowd out domestic private investments by adopting extended expansionary fiscal policies. Therefore, large budget deficits should be excluded from the government agenda, especially as long as capital inflows remain relatively limited. Third, national tax policies are indeed effective in altering the real net rate 6 The 1973 break point reflects the change in the political regime from dictatorship to democracy. We use the year 1981 as a break point as a socialist government took power and changed radically economic matters. These two changes are considered to have a major impact on the Greek economy. It is also worth noting that — under a flexible exchange rate regime — during 1974–1981, where the S–I cointegration is closer (see Fig. 1), the current account was almost balanced (−0.4% of GDP). On the contrary, an CA imbalance is observed for the periods 1961–1970 (−2.3%), 1981–1990 (−2.5%) and 1990–1997 (−2.1%), where, indeed, a more or less fixed exchange rate regime/policy prevailed either due to the Bretton Woods regime (1960s) or due to Greece’s accession to EU in 1980 (EC economic data pocket book, p. 33).
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
615
of return on domestic capital, as the latter remains, to a large extent, within national borders. At least up to the present. As far as Greece’s effort to keep up with the EMU requirements is concerned, policy-makers should focus on reforms aiming at attracting foreign investments in particular. Although the specific contents of reforms are beyond the scope of this note, it has to be emphasized that policy makers should focus on attracting foreign capital so as to stop counting so heavily on domestic savings. Acts reducing taxation on foreign capital as well as measures fighting local labor market rigidities could both establish favorable conditions for capital inflows. In that case, the expected surge of capital inflows would allow automatic fiscal stabilizers to work in case of a normal recession and stabilize the economy without crowding out domestic investments, while at the same time respecting the “Stability and Growth Pact.” The option of a countercyclical fiscal policy may sometimes prove of crucial importance for EU member-states such as Greece, which need higher growth rates to converge with the EU core. As already mentioned, national tax policies are indeed effective in altering the real net rate of return on domestic capital in case of a relatively closed economy such as Greece. Thus, the policy option of tax incentives for foreign capital could be substantially used to attract inflows, letting the country take advantage of the global financial markets. In that case, fiscal expansion may be useless even in a recession period, a fact which in turn would make much more easier for policy makers to keep the budget in balance, to reduce the public debt, and to keep interest rates and inflation at European levels. In this note, the “national saving–domestic investment” correlation has been examined in terms of an error correction model, in order to gain some insight into the degree of capital mobility, using Greek data for the period 1960–1997. In particular, we employed co-integration analysis with an emphasis on the error correction process of the time series on annual data for Greece. The results show that Greek domestic investment and national saving (1960– 1997) are to a great extent cointegrated and that a significant long-run relationship also exists. Although the short-run correlation decreases particularly since the 1980s, our results do not confirm the hypothesis that Greece has developed significant, extended links with global capital markets. Nevertheless, since 1981, these links seem somehow to strengthen, although they remain originally and relatively weak.
References Alexakis, P., Apergis, N., 1994. The Feldstein–Horioka puzzle and the exchange rate regimes: Evidence from cointegration tests. Journal of Policy Modeling 16 (5), 459–472. Bajo-Rubio, O., 1998. The saving–investment correlation revisited: The case of Spain, 1964–1994. Applied Economic Letters 5, 769–772. Coakley, J., Kulasi, F., Smith, R., 1998. The Feldstein–Horioka puzzle and capital mobility: A review. International Journal of Finance and Economics 3 (2), 169–188.
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Feldstein, M., 1983. Domestic saving and international capital movements in the long run and the short run. European Economic Review 21, 129–151. Feldstein, M., & Bacchetta, P. (1989, November). National saving and international investment. NBER Working Paper Series No. 3164. Feldstein, M., Horioka, C., 1980. Domestic saving and international capital flows. Economic Journal 90 (2), 314–329. Frankel, J. (1989, February). Quantifying international capital mobility in the 1980s. NBER Working Paper Series No. 2856. Jansen, W. J., & Schulze, G. G. (1993). Theory-based measurement of the saving–investment correlation with an application to Norway. Discussion Paper 205, Universitat Konstanz, Konstanz. Leachman, L., 1991. Saving, investment and capital mobility among OECD countries. Open Economies Review 2, 137–163. Miller, S., 1988. Are saving and investment cointegrated? Economic Letters 27, 31–34. Obstfeld, M. (1995). International capital mobility in the ’90s. In P. B. Kenen (Ed.), Understanding interdependence: The macroeconomics of the open economy (pp. 201–261). Princeton: Princeton University Press. Obstfeld, M., & Rogoff, K. (2000, July). The six major puzzles in international macroeconomics: Is there a common cause? NBER Working Paper Series No. 7777. Rodrik, D., 2000. How far will international economic integration go? Journal of Economic Perspectives 14 (1), 177–186. Tesar, L., 1991. Savings investment and international capital flows. Journal of International Economics 31 (1/2), 55–78. Vikoren, B. (1994). Interest rate differential exchange rate expectations and capital mobility: The Norwegian evidence. Norges Bank Skriftserie, 21. Wong, D., 1990. What do saving–investment relationships tell us about capital mobility? International Journal of Finance and Economics 9 (1), 60–74.
The saving–investment correlation in Greece, 1960–1997: implications for capital mobility Theodore Pelagidis∗ , Tasos Mastroyiannis Department of International and European Studies, Panteion University of Athens, 136 Sygrou Avenue, Athens GR-17671, Greece Received 31 December 2001; received in revised form 28 August 2002; accepted 10 September 2002
Abstract In this note, the national saving–domestic investment correlation is examined in terms of an error correction model to gain some insight into the degree of capital mobility, using Greek data for the period 1960–1997. In particular, we employ cointegration analysis with an emphasis on the error correction process of the time series on annual data for Greece. Our work follows the study of Bajo-Rubio [Appl. Econ. Lett. 5 (1998) 769] that deals with the case of Spain. However, we use a longer time period, which enable us to examine with more preciseness the saving–investment relationship in Greece and its implications for capital mobility. The results show that Greek domestic investments and national savings during 1960–1997 are to a great extent cointegrated and that a significant long-run relationship exists. © 2003 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. JEL classification: F41; Macro focus Keywords: Saving; Investment; Globalization
1. Introduction There is a consensus among professional economists that full capital mobility increases welfare by allowing efficient allocation of factors of production. Welfare results are indeed optimized in case allocation is taking place at a global level. The argument is, beyond any doubt, sound and true. However, perceptions in the ∗
Corresponding author. Tel.: +30-10-7216033; fax: +30-10-9218427. E-mail address: [email protected] (T. Pelagidis).
0161-8938/$ – see front matter © 2003 Society for Policy Modeling. doi:10.1016/S0161-8938(03)00053-X
610
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
literature about the extent and importance of global capital integration in the last 20 years vary, depending on how global capital mobility is measured. The established academic consensus about the degree of global capital markets integration has been even more destabilized since the appearance of the seminal paper by Feldstein and Horioka (1980) on the S–I correlation. The Feldstein–Horioka (F–H) puzzle, that a close relationship between national savings and domestic investments constitutes a stable regularity in the OECD countries, continues to challenge economic orthodoxy as the majority of related tests continue showing a saving–investment retention coefficient that lies quite far from zero.1 Despite objections concerning F–H tests robustness, the puzzle still remains a stylized fact as related studies and tests confirm more or less a strong “home bias” in capital markets and, so, research efforts to solve the puzzle are still of high priority (Rodrik, 2000).2 Such efforts have been recently focused on indirect ways to explain the puzzle by introducing imperfect goods market integration (Obstfeld & Rogoff, 2000). We believe that imperfections even if they could be found in goods market, should be less globally homogeneous and so have to be investigated at a national level. Applying various tests country by country could help not only to examine whether — and how much — a single country is financially integrated into the global economy. It could also help us to find out whether F–H tests continue to be valid. It is reminded that the overestimation and sometimes the misunderstanding of the extent of financial globalization could lead individual countries to unsuitable policy responses with catastrophic results. Thus, to measure capital mobility and a country’s integration to global capital markets is of cardinal importance for policy prescriptions as well. In this context, the very first issue needs clarification is whether financial globalization has really gone far for each country. In this note we reassess the relative importance of national economic ties in the case of Greece. The note measures the evolution of the financial integration of the Greek economy during the period 1960–1997. We employ cointegration analysis with an emphasis on the error correction process of the time series on annual data for Greece for the period 1960–1997. Our work follows the study of Bajo-Rubio (1998) that deals with the case of Spain. However, we use a longer time period, which enable us to examine with more preciseness the saving–investment relationship in Greece. In the last section we focus on the policy implications of the findings. We give emphasis to policy guidelines especially in the context of Greece’s efforts to keep up with the EMU requirements. 1
See Coakley, Kulasi, and Smith (1998) for an excellent survey. Such as “endogeneity” or efforts to prove that even a high retention coefficient does not necessarily mean that world capital mobility is imperfect. Also, Alexakis and Apergis (1994), using the methodology of cointegration — in the context of a general equilibrium optimization model capable of generating artificial model data of savings and investment — find no link between savings and investment, supporting the case of highly integrated capital markets. 2
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
611
2. On the F–H puzzle Investigating the saving–investment relationship, Feldstein and Horioka (1980) regressed the Investment/GDP ratio to the Saving/GDP ratio using the equation: S I i=␣+ i + ui Y Y where  is the saving–investment retention coefficient and ui is the standard error. The equation represents an indirect way to test the full capital mobility hypothesis as it measures the share of domestic investment financed by foreign capital. In other words,  reveals the extent to which an incremental change in national saving remains home and finances domestic investment. In this context,  is expected to be around 0 in case of full capital mobility as incremental national saving is expected to move globally to require the highest profitability. On the other hand, each individual country is expected to finance domestic investment by a global capital pool. Using cross section data for 23 industrial countries, Feldstein and Horioka (1980) investigated the saving–investment relationship for the period 1960–1974 and found that the retention coefficient () is around 0.85–0.95, that is for every unit change in national saving, domestic investment changes 85–95% as well. That means that domestic investment continues to be basically determined by national saving and, thus, cross border capital mobility remains limited. Their results confirmed by Feldstein (1983) and Feldstein and Bacchetta (1989), extending the period up to the mid 1980s. Frankel (1989) and Tesar (1991), despite econometric in nature objections, accepted that  for the aforementioned periods is much closer to 1 than to 0 and in any case continues to be very high during the 1980s in most of the countries. Wong (1990), Tesar (1991), Obstfeld (1995), and Coakley et al. (1998), argue that in cases such as in the US, where since the 1980s foreign investment massively entered the country,  should be much lower.3 That is why we insist that detailed case studies are needed today both to test for F–H robustness and to investigate the degree of capital mobility. In this context, we focus below on the Greek case. 3. Econometric analysis and empirical results Within the framework of time series analysis, we use the cointegration approach to examine the magnitude as well as the stability of the saving retention coefficient for Greece. A number of studies have used time series analysis (Miller, 1988; Leachman, 1991; Vikoren, 1994; Jansen and Schulze, 1993; Bajo-Rubio, 1998).4 3 Obstfeld and Rogoff (2000), have recently estimated that  = 0.60 for the OECD countries (1960–1997, average). Also, for the same period, US NS/Y = 0.15 and I/Y = 0.17 (same period). 4 For a survey of the various econometric approaches to the F–H puzzle see Coakley et al. (1998) and Tesar (1991).
612
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
Fig. 1. Saving and investment rates in Greece 1960–1997. Table 1 Dickey–Fuller unit root test yt = c + ␥c t + c yt−1 + ε yt = b + yt−1 + ε yt = ␣ yt−1 + ε
(1) (2) (3) S
I
(A) Levels c ␣
−1.77 −1.26 −0.42
−2.26 −1.71 −0.31
(B) First difference c ␣
−5.37∗ −5.36∗ −5.42∗
−6.26∗ −6.16∗ −6.25∗
MacKinnon critical values for rejection of the null of unit root are used. Asterisks (∗, ∗∗, ∗∗∗) denote significance levels at 1, 5, and 10% correspondingly.
We follow the work of Jansen and Schulze (1993), and use error correction model to examine the saving investment correlation. Our analysis is based on annual data on gross national savings rate (S) and gross domestic investment rate (I) (both are expressed as a percentage to GDP). The source of the data is the Ministry of National Economy of Greece.5 Fig. 1 plots both series. The time series properties of the series are examined using the Dickey–Fuller unit root tests. Results are presented in Table 1. Both series appear to be integrated of order one (1). We examine the saving investment correlations using the following equation: It = aECM + bECM St + cECM (St−1 − It−1 ) + d ECM St−1 + εt
(4)
5 Hellenic Democracy, The Ministry of National Economy, The Greek Economy: 1960–1997, Semi–annual report, Athens, 1998, Table 6.
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
613
Fig. 2. Recursive estimates of the short run coefficient bECM .
The coefficient bECM measures the short run response of investment to a unit change of savings. Significant non-zero values for the coefficient cECM indicate that saving and investment rates are cointegrated, and in addition provide an estimate for the speed of adjustment of investment to the previous period’s deviation from the long-run equilibrium. If the coefficient d ECM = 0, the current account is stationary around some constant, and if aECM = d ECM = 0, it is zero. The regression results are as follows (t-statistics in italics): It = 4.63 + 0.91St + 0.69(St−1 − It−1 ) − 0.14St−1 + εt 3.71
11.54
4.45
−3.18
R = 0.80, = 1.18, DW = 1.83, BG(1) = 0.35, BG(2) 2
= 1.39, ARCH(1) = 1.32, JB = 0.3
(5)
All estimates are significantly different from zero. The results indicate that (a) the variables are co-integrated, (b) there is significant short run correlation between saving and investment, and (c) there is a deficit in the current account in the long run. The diagnostic tests indicate that Eq. (5) is well specified. Furthermore, the
614
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
coefficient has a tendency to decrease over time as is shown by its recursive estimate in Fig. 2. To examine the possibility that the coefficient of S changes over time, we re-estimate Eq. (4) by allowing its coefficient to vary among different sample periods. We use three sample periods: 1960–1973, 1974–1981, and 1982–1997.6 The estimated equation becomes: It = 4.36 + 1.17D1 × St + 0.94D2 × St + 0.71D3 × St 3.38
6.68
7.93
5.6
+ 0.61(S t−1 − I t−1 ) − 0.14St−1 + εt 3.82
−3.1
R = 0.82, = 1.13, DW = 1.92, BG(1) = 0.003, BG(2) 2
= 1.50, ARCH(1) = 0.7, JB = 0.38
(6)
The coefficient of S is significantly different from zero for all sub-periods. Furthermore and most importantly, the coefficient of S is progressively reduced. All diagnostic tests are passed.
4. Policy implications and concluding remarks As far as policy implications are concerned, since increases or decreases in domestic investments seem to be followed by simultaneous increases in national savings, the role of national savings is of cardinal importance for domestic investments in Greece. Policy implications are the followings: First, by affecting national savings, the Greek government can also influence the level of domestic capital formation. As a consequence, higher levels of domestic investments can primarily and mainly be financed by higher national savings. Second, as national savings are, to a large extent, negatively affected by budget deficits and as capital inflows and foreign direct investments in particular remain anemic, the Greek government has to be cautious not to crowd out domestic private investments by adopting extended expansionary fiscal policies. Therefore, large budget deficits should be excluded from the government agenda, especially as long as capital inflows remain relatively limited. Third, national tax policies are indeed effective in altering the real net rate 6 The 1973 break point reflects the change in the political regime from dictatorship to democracy. We use the year 1981 as a break point as a socialist government took power and changed radically economic matters. These two changes are considered to have a major impact on the Greek economy. It is also worth noting that — under a flexible exchange rate regime — during 1974–1981, where the S–I cointegration is closer (see Fig. 1), the current account was almost balanced (−0.4% of GDP). On the contrary, an CA imbalance is observed for the periods 1961–1970 (−2.3%), 1981–1990 (−2.5%) and 1990–1997 (−2.1%), where, indeed, a more or less fixed exchange rate regime/policy prevailed either due to the Bretton Woods regime (1960s) or due to Greece’s accession to EU in 1980 (EC economic data pocket book, p. 33).
T. Pelagidis, T. Mastroyiannis / Journal of Policy Modeling 25 (2003) 609–616
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of return on domestic capital, as the latter remains, to a large extent, within national borders. At least up to the present. As far as Greece’s effort to keep up with the EMU requirements is concerned, policy-makers should focus on reforms aiming at attracting foreign investments in particular. Although the specific contents of reforms are beyond the scope of this note, it has to be emphasized that policy makers should focus on attracting foreign capital so as to stop counting so heavily on domestic savings. Acts reducing taxation on foreign capital as well as measures fighting local labor market rigidities could both establish favorable conditions for capital inflows. In that case, the expected surge of capital inflows would allow automatic fiscal stabilizers to work in case of a normal recession and stabilize the economy without crowding out domestic investments, while at the same time respecting the “Stability and Growth Pact.” The option of a countercyclical fiscal policy may sometimes prove of crucial importance for EU member-states such as Greece, which need higher growth rates to converge with the EU core. As already mentioned, national tax policies are indeed effective in altering the real net rate of return on domestic capital in case of a relatively closed economy such as Greece. Thus, the policy option of tax incentives for foreign capital could be substantially used to attract inflows, letting the country take advantage of the global financial markets. In that case, fiscal expansion may be useless even in a recession period, a fact which in turn would make much more easier for policy makers to keep the budget in balance, to reduce the public debt, and to keep interest rates and inflation at European levels. In this note, the “national saving–domestic investment” correlation has been examined in terms of an error correction model, in order to gain some insight into the degree of capital mobility, using Greek data for the period 1960–1997. In particular, we employed co-integration analysis with an emphasis on the error correction process of the time series on annual data for Greece. The results show that Greek domestic investment and national saving (1960– 1997) are to a great extent cointegrated and that a significant long-run relationship also exists. Although the short-run correlation decreases particularly since the 1980s, our results do not confirm the hypothesis that Greece has developed significant, extended links with global capital markets. Nevertheless, since 1981, these links seem somehow to strengthen, although they remain originally and relatively weak.
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