Saving-Investment: A Spacey Relationship

Abstract

The objective of this paper is to show that saving-investment regressions are biased toward capital immobility because of the failure to control for the endogeneity of investment rates across countries. Using a spatial autoregressive lag process, we show the saving coefficient is significantly lower and statistically insignificant from zero for small open economies. We assume investment is correlated using the differences in saving rates across countries, i.e. high saving countries are more likely to invest in low saving countries, which will increase the correlation between investment rates across countries.