The Long-Run Relationship Between Saving And Investment: Stylized Fact Or Fiction?

The high correlation between domestic saving and investment rates in cross country regressions has been interpreted by some authors as evidence that world capital markets are not integrated. Our paper reexamines the long-run saving investment relationship across OECD countries using co integration methods. This approach enables us to provide evidence regarding this relationship at a desegregated level, that is, for each country separately. It also accounts for the non-stationary of the underlying time series. In order to estimate long-run saving-investment correlation as well as to correct for simultaneous equation bias, for a non-linear single-equation error correlation model is used. The results qualify the conclusions of the previous studies by suggesting that saving and investment rates are not highly correlated in the long run for most OECD countries.