EXPLAINING SAVING INVESTMENT CORRELATIONS

National saving and investment rates are highly positively correlated in virtually all countries. This is puzzling, as it apparently implies a low degree of international capital mobility. This paper shows that the observed positive correlation between national saving and investm ent rates arises naturally within a quantitatively restricted equilibr ium model with perfect mobility of financial and physical capital. The model is consistent with the fact that saving - investment correlatio ns are larger for larger countries but are still substantial for small countries. Further, the model is consistent with the finding that cur rent-account deficits tend to be associated with investment booms.