NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

National Saving and International Investment

Martin Feldstein, Philippe Bacchetta

NBER Working Paper No. 3164 (Also Reprint No. r1687)*
Issued in January 1992
NBER Program(s):   ITI    PE    IFM

This paper extends earlier work by Feldstein and Horioka on the relation

between domestic saving rates and international capital flows or, equivalently,

between domestic saving rates and domestic investment. The basic conclusion of

the present analysis is that an increase in domestic saving has a substantial

effect on the level of domestic investment although a smaller effect than would

have been observed in the 1960s and 1970s. The savings retention coefficient

for the 1980-86 period is 0.79, down from 0.91 in the l960s and 0.86 in the

1970s.

The more closely integrated economies of the EEC also appear to have more

outward capital mobility (i.e., a lower saving retention coefficient) than

other OECD countries.

There is no support for the view that the estimated saving-investment

relation reflecta a spurious impact of an omitted economic growth variable.

Although budget deficits are inversely related to the difference between

private investment end private saving, we reject the view that this reflects an

endogenoua response of fiscal policy in favor to the alter-native interpretation

that the negative reletion is evidence of crowding out of private investment by

budget deficits. This interpretation is supported by the evidence that

domestic investment responds equally to private saving and to budget deficits.

The implication of the analysis thus supports the original Feldstein-

Horioka conclusion that increase in domestic saving does raise a nation's

capital stock and therefore the productivity of its workforce. Similarly, a

tax on capital income is not likely to be shifted fully to labor and land by

the outflow of enough capital to maintain the real rate of return unchanged.

*Published: This paper was subsequently published as National Saving and International Investment, Martin Feldstein, Philippe Bacchetta, in NBER book National Saving and Economic Performance (1991)

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