Theory-based measurement of the saving-investment correlation with an application to Norway

Abstract

The work of Feldstein and Horioka has stimulated much research on the correlations of national savings and investment rates and their relation to the degree of international capital mobility. Theory implies a cointegrating relation between these variables, which suggests this correlation is measured best by an error correction model. This model includes all previous specifications as special cases, which we show are potentially misspecified on theoretical grounds. Applied to Norway, our model outperforms prevailing specifications. We detect structural breaks, and find the correlation's time profile is consistent with other indicators of capital mobility.