Savings–Investment Correlations: Transitory versus Permanent

In: The Manchester School, Band 66, Heft S, S. 17-38

Abstract

In this paper we investigate the difference between the short‐run and the long‐run savings–investment correlation coefficient, in order to shed light both on the validity of the Feldstein–Horioka regression as a means of measuring the degree of capital mobility and on its implications. Using quarterly UK data, we also examine the effectiveness of the abolition of exchange control which, in October 1979, ended a long period of restrictions on capital flows between the UK and the international economy. We find that, consistent with the logical implication of the Feldstein–Horioka regression, the short‐run correlation is significantly higher than the long‐run correlation. In contrast with much of the literature employing the Feldstein–Horioka interpretation, however, the results suggest that the UK is highly financially integrated with the global economy post 1979.