Domestic Savings and International Capital Flows

Abstract

This paper uses new statistical estimates to compare two views of international capital mobility.With perfect world capital mobility, there would be little or no relation between the amount of saving generated in a country and the domestic investment in that country.In contrast, if portfolio preferences and institutional rigidities impede the flow of long-term capital among countries, increases in domestic saving would be reflected primarily in additional domestic investment.The statistical evidence presented here on the relation between domestic investment and saving implies that the truth lies closer to the second view than to the first.International differences in domestic savings rates among major industrial countries have resulted in almost equal corresponding differences in domestic investment rates.The paper discusses the compatability of this evidence with the obvious international mobility of short-term liquid capital and with the existence of substantial international flows of long-term portfolio and direct investments.There is a brief discussion of the relevance of the new evidence for the optimal national saving policy and for the analysis of tax incidence.