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Journal of Economic Integration 2005 September;20(3) :590-603.
What do Savings-Investment Correlations tell us about the International Capital Mobility of Less Developed Countries?

Mark J. Holmes 

Waikato University Management School
Copyright ©2005 Journal of Economic Integration
This paper investigates the extent of capital mobility with respect to less developed countries over the study period 1979-2001. For this purpose, the Feldstein-Horioka equation linking domestic savings and investment is estimated. However, there is a novel empirical approach in this study based on the employment of panel data methods of cointegration testing and estimation of the long-run saving retention coefficient. There is strong evidence of cointegration between domestic savings and investment. Panel estimation based on fully modified ordinary least squares indicates that capital is imperfectly mobile with a long-run saving retention coefficient of about one-third. This low value suggests that capital mobility, though imperfect, is nonetheless quite high. Further estimation based on sub-groups comprising Asian and Latin American countries points towards a similar degrees of capital mobility.

JEL Classification
C5: Econometric Modeling
F3: International Finance
F4: Macroeconomic Aspects of International Trade and Finance
O5: Economywide Country Studies
Keywords: LDCs | Capital mobility | Savings | Investment | Panel data | Cointegration
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