INTERPRETING SAVING-INVESTMENT CORRELATIONS

Feldstein and Horioka (1980) argued that the cross-sectional correlati on of saving and investment provides a test of global capital mobility . We argue that the long-run correlation is determined by the intertem poral budget constraint, limited capital mobility and current account targeting. The short-run correlation reflects limited capital mobility and adjustment to supply and demand shocks. Our empirical analysis sh ows that the short-run correlation Varies across countries and not ove r time, which suggests that it is a country-specific business cycle fa ct. The long-run correlation has substantially decreased over time, wh ich suggests that limited capital mobility is partly responsible for i ts high value in the past.