Public and Private Saving and Investment

We decompose aggregate saving and investment into its public and private components and then document a variety of "stylized facts" associated with saving and investment rates of a sample of 15 countries over the period 1975-1989. In order to see whether these empirical relationships are consistent with a world of perfect capital mobility we develop a multicountry model with free trade in a risk-free bond and calibrate it to the fifteen OECD countries. We pay special attention to modeling the fiscal policy rules. The model performs remarkably well in accounting for a wide variety of time series relationships. Nonetheless the model is not able to capture the cross sectional aspect of the data. In particular, the model can not account for both the large cross country correlation between aggregate saving and investment rates and the very negative cross country relationship between the public and private saving minus investment gaps