Journal Issue

International Capital Mobility: What Do Saving-Investment Correlations Tell Us? Reply to Miller

International Monetary Fund. Research Dept.
Published Date:
January 1988
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Miller’s interesting argument is a good example of a class of alternative explanations of saving-investment correlations. The basic idea behind these arguments is that sources of independent shocks to national saving and investment rates that are thought to be important quantitatively are either not independent or are not shocks at all. In this case, it is argued that there arc good reasons to believe that changes in debt-financed government expenditures are fully offset ex ante by changes in an ultrarational private sector’s saving and investment behavior. Thus, from the point of view of international capital markets, no disturbance will be observed. A similar argument is that, although there are various shocks to the system that appear to require net saving flows across countries, these shocks are fully dissipated by changes in relative prices so that no observed intertemporal trade is predicted.

In general, we find these arguments interesting but, so far. unconvincing. In reference to Miller’s argument, we would assume that there are other shocks to national saving and investment rates, in addition to changes in governments’ saving and investment behavior. An ultra-rational private sector might neutralize changes in government behavior, but this is only one of a multitude of disturbances that could produce intertemporal trade across national boundaries. For example, a technological breakthrough would surely favor an uneven increase in the capital stock of countries with different production functions. Moreover, countries with dissimilar age profiles for their populations would presumably engage in intertemporal trade.

Finally, if the correct description of the world is one in which there are no ex ante reasons for net capital flows, then the whole issue of capital mobility is of no interest. Indeed, the degree of capital (as opposed to goods) mobility would have no welfare implications.



The latest in the Fund’s series of projections for the world economy covers developments since October 1987. An analysis of recent developments and short-term prospects is followed by a discussion of medium-term policy issues in industrial and developing countries. Supplementary notes on topical issues, such as equity prices, exchange rates, and trade, and a substantial statistical appendix, complete the volume.

189 pages; ISBN 1-55775-011-4

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Mr. Dooley, Chief of the External Adjustment Division in the Research Department of the Fund, is a graduate of Duquesne University, the University of Delaware, and the Pennsylvania State University.

Mr. Frankel is Professor of Economics at the University of California. Berkeley, and a graduate of Swarthmore College and the Massachusetts Institute of Technology.

Mr. Mathieson, Chief of the Financial Studies Division in the Research Department, was educated at the University of Illinois and Stanford University.

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