THEORY-BASED MEASUREMENT OF THE SAVING-INVESTMENT CORRELATION WITH ANAPPLICATION TO NORWAY

The work of Feldstein and Horioka has stimulated much research on the correlations of national savings and investment rates and their relati on to the degree of international capital mobility. Theory implies a c ointegrating relation between these variables, which suggests this cor relation is measured best by an error correction model. This model inc ludes all previous specifications as special cases, which we show are potentially misspecified on theoretical grounds. Applied to Norway, ou r model outperforms prevailing specifications. We detect structural br eaks, and find the correlation's time profile is consistent with other indicators of capital mobility.