This study examines the long-run relationship between domestic saving and investment and takes a country-by-country account of the mobility of capital and integration of international financial markets. The analysis is carried out for a comprehensive set of 24 OECD countries. The study finds support for the cointegrating relationship between domestic saving and investment for a number of countries. The slope parameter of saving remains well above zero for most countries. The support for cointegration between domestic saving and investment suggests the sustainability of current account deficits and the solvency of intertemporal budget constraint. The degree of capital mobility and the integration of financial markets vary across countries. The reliance on domestic saving in the countries with low to moderate mobility of capital underlines the need to accelerate domestic saving to finance the accumulation of capital and keep the current account imbalances in sustainable bounds. The investment in the countries with high mobility of capital is financed by a world pool of capital. The major concerns for the countries with high mobility of capital are the vulnerability to the speculative (systematic or stochastic) expectations (rational or irrational) of international investors, sustainability of current account deficits, adequacy of foreign exchange reserves, and the stability of the financial system.

Read More: http://ejournals.duncker-humblot.de/doi/abs/10.3790/aeq.63.1.1