Capital Mobility and Saving-Investment Dynamics
Summary
Capital mobility and saving-investment dynamics lie at the heart of open-economy macroeconomics, probing how easily financial resources cross national frontiers and the extent to which domestic investment is financed by homegrown savings or by foreign capital. The Feldstein–Horioka puzzle, which documents a surprisingly strong positive correlation between national saving and investment rates despite financial liberalisation, has driven decades of research. Theoretical frameworks invoke intertemporal budget constraints, cointegration between saving and investment ratios, and the distinction between long-run solvency conditions and short-run market frictions. Empirical studies have extended traditional cross-sectional regressions to dynamic panels, error-correction models and structural-break tests, thereby addressing nonstationarity, endogeneity and heterogeneity across countries. Evidence points to high but imperfect capital mobility in advanced economies, with episodic reversals during crises, while emerging and developing regions exhibit persistent home bias, often due to underdeveloped financial markets, regulatory barriers and goods-market frictions. Policy implications are profound: understanding the channels and obstacles to cross-border flows informs macroprudential frameworks, regional integration agreements and national savings policies, all of which shape global financial stability and growth prospects.
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Capital Mobility and Saving-Investment Dynamics publication trend
The graph below shows the total number of articles in capital mobility and saving-investment dynamics across all publications each year (not limited to Nature Index journals).
Technical terms
Capital mobility: The degree to which capital can flow across borders freely, responding to differences in returns.
Saving-investment retention coefficient: The estimated elasticity measuring how much domestic saving finances domestic investment.
Cointegration: A statistical property indicating a stable long-run relationship between two or more non-stationary time series.
Error-correction model (ECM): A dynamic representation capturing both short-run adjustments and long-run equilibrium between integrated variables.
Feldstein–Horioka puzzle: The empirical observation that cross-country saving and investment rates remain highly correlated despite financial globalisation.
References
- 50 Years of Capital Mobility in the Eurozone: Breaking the Feldstein-Horioka Puzzle. Open Economies Review (2021).
- The Rise and Fall of Financial Flows in EU 15: New Evidence Using Dynamic Panels with Common Correlated Effects. Computational Economics (2023).
- The Feldstein–Horioka Puzzle or Paradox after 44 years: a fallacy of composition. The Japanese Economic Review (2024).
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