Savings investment correlations and capital mobility in developing countries

Abstract

The author estimates savings and investment correlations for 58 developing countries to assess the capital mobility (in the Feldstein-Horioka sense) in these countries. Using a new estimation technique (fully modified ordinary least squares) - which simultaneously corrects for serial correlation, endogeneity, and sample bias (asymptotically) - the author finds that many developing countries are financially integrated in the long run. More important, the estimates from this robust estimation technique indicate that savings-investment correlations are lower for middle-income than for lower-income countries. The author also provides evidence of capital mobility for several of these countries in the short run.

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