Agénor, P.-R., C. Bismut, P. Cashin and C. J. McDermott, “Consumption Smoothing and the Current Account: Evidence for France, 1970-94”, I.M.F. Working Paper, WP/15/119, November 1995.
Barro, R. J., N. G. Mankiw and X. Sala-i-Martin, “Capital Mobility in Neoclassical Models of Growth,” American Economic Review, Vol 85, No. 1, March 1995.
Broeder, C. den and C. Winder, “Financing Government Spending in the Netherlands: An Analysis from Ricardian Perspective”, De Economist, 140 (1), 1992.
De Gregorio, J., A. Giovannini and T. H. Krueger, “The Behavior of Nontradable Goods Prices in Europe: Evidence and Interpretation,” I.M.F. Working Paper, WP/93/45, May 1993.
De Gregorio, J., A. Giovannini and H. C. Wolf, “International Evidence on Tradables and Nontradables Inflation,” I.M.F. Working Paper, WP/94/33, March 1994.
Gardner, E., “Taxes on Capital Income”, in “Tax Harmonization in the European Community”, I.M.F. Occasional Paper 94, July 1992.
Kremers, J. J. M., “The Dutch Disease in the Netherlands,” in J. P. Neary and S. van Wijnbergen (eds.), Natural Resources and the Macroeconomy, Oxford: Blackwell, 1986.
McDonald, D., “Implications of Unification for Saving and Investment in West Germany,” in L. Lipschitz and D. McDonald (eds.), German Unification: Economic Issues, I.M.F. Occasional Paper No. 75, December 1990.
Micossi, M. and G. M. Milesi-Ferretti, “Real Exchange Rates and the Prices of Nontradable Goods,” I.M.F. Working Paper, WP/94/19, February 1994.
Obstfeld, M., “Capital Mobility in the World Economy: Theory and Measurement,” Carnegie Rochester Conference Series on Public Policy, 24, 1986.
Obstfeld, M. and K. Rogoff, “The Intertemporal Approach to the Capital Account”, National Bureau of Economic Research Working Paper No. 4893, October 1994.
Razin, A., “The Dynamic Optimizing Approach to the Current Account: Theory and Evidence”, in P. Kenen (ed.), Understanding Interdependence: The Macroeconomics of the Open Economy, Princeton University Press, Princeton, NJ: 1995.
Sakellaris, P., “A Note on Competitive Investment Under Uncertainty: Comment”, American Economic Review, Vol. 84, No. 4, September 1994.
I would like to thank, without implication, Uli Baumgartner, Willem Buiter, Paul Masson, Donogh McDonald, Ramana Ramaswamy, Max Watson, as well as participants in the European I Department Seminar Series, for helpful comments, and Susan Becker for research assistance.
This is not inconsistent with the fact that household and business saving remained roughly constant between 1970 and 1982. In fact, one should have expected a substantial improvement in these two categories of saving, precisely in view of the fiscal deterioration. Empirical evidence for the Netherlands suggests that, while Ricardian equivalence in its extreme form is rejected, private saving typically offsets over 50 percent of a change in public saving; see, for example, den Broeder and Winder (1992).
In net terms, the private saving rate also fell during this period.
Note that the increase in government saving fell short of the magnitude of deficit reduction attained, as public investment bore part of the burden of fiscal consolidation.
The decline in both saving and investment in the early 1990s is attributable to cyclical factors.
For a survey of the relevant arguments and a description of the Dutch institutional structure see Bakker (1993).
Based on the 1991 tax laws in various countries, Gardner (1992) has estimated that the after-tax proportion of distributed profits reaching the shareholder is a mere 26 percent in the Netherlands, compared to 58 percent in Germany and 60 percent in the U.K.
For instance, the supplementary pension schemes were introduced in the 1950s and 1960s, while the double taxation of dividends has been a longstanding feature of the Dutch fiscal system.
For example, a substantial part of mortgage credit is widely regarded as having effectively served as a close substitute for consumer spending in recent years.
This, of course, need not imply that the impact of demographics on desired household saving has been negligible. To the extent that liquidity constraints had been important, it could suggest a reduction in the “forced” component of household saving.
In fact, the guilder was devalued vis-à-vis the D-mark in 1983.
A positive response of total saving to increased capital mobility, presumably reflecting a higher rate of return would strengthen this effect. However, empirical evidence for a number of countries has tended to suggest that the interest elasticity of saving is rather low.
The conclusion that the impact of closer capital market integration on saving and investment may have been smaller than is generally thought is corroborated by evidence from other countries. In a recent paper on France, Agénor et. al. (1995) directly test an intertemporal model, and conclude that strict capital controls up to the late 1980s did not prevent French households from attaining an optimal consumption path.
At this stage of the argument, it is not very important to determine the sources of the change in relative factor prices. In particular, the relevant linkages would be virtually identical whether the factor price changes can be best characterized as exogenous, or whether they themselves have been caused by underlying factor supply developments. This point will be addressed briefly below.
The impact on total private saving would be higher to the extent that, in the short-run, low wage growth lowers the household consumption to GDP ratio, thus increasing the household saving rate as well.
The employment figures are expressed in terms of full-time equivalents; the increase in the number of persons employed was substantially higher.
Estimations using the real hourly wage in manufacturing as the wage variable produced essentially identical results.
In addition to an argument involving adjustment costs, partial adjustment of this type can also be rationalized in terms of adaptive expectations about the independent variables, in this case relative factor prices. This consideration also appears pertinent to the problem at hand. It would be reasonable to assume that it took some time for Dutch producers to become convinced that wage moderation would become a permanent feature of the Dutch economy in the period since the early 1980s.
For both variables, a Chow test failed to reject stability across sub-samples.
In order to further test the robustness of the postulated effect, the labor income share in total value added was also considered as a potential explanatory variable. While this variable is in some ways a less reliable indicator of relative factor prices since it compounds changes in factor prices and changes in factor proportions, it should capture any bias caused by the assumption that the real price of capital has fluctuated much more moderately than the price of labor over the estimation period. The estimation results, while entailing lower explanatory power and lower significance levels were entirely consistent with the results presented above, suggesting that any mis-specification with regard to the relative factor price variable is not likely to be important.
This is the approach taken, among others, by McDonald (1990) in analyzing saving-investment trends in Germany.
More accurately, the current account surplus should not be viewed as a symptom of underlying distortions warranting policy intervention.
Strictly speaking, this is not entirely correct. The solution would depend on what form technical progress takes, i.e., whether it is “labor-saving” or “capital-saving.”
This effect is only partially offset by the reduction in the relative demand for nontradables (given their higher income elasticity) deriving from the reduction in household disposable income resulting from the government’s increased financing needs.
In fact, the CPB’s medium-term macroeconometric model FKSEC imposes the assumption that in the sheltered sector labor constitutes the only factor of production.
Obviously, the relative output of the two sectors will depend on both supply and demand conditions.
Obviously, this assumption does not involve loss of generality: all that we need to assume is that the share of the nontradable good in government consumption is higher than the corresponding share in private consumption.
It should be pointed out that the authors’ finding that the impact of a (permanent) demand shift towards nontradable goods on relative prices is lower in the long-run would imply that their impact on relative quantities should be higher in the long-run. The underlying mechanism is one in which entry of new firms into the sheltered sector over the long-run tends to return relative prices to their initial level, while resulting in further increases in the relative output of the sheltered sector.
The authors based the distinction on the actual degree of tradability (defined as the share of value added that is exported) of different categories of goods and services. They found that, while all categories of goods qualified as tradables, all service categories, with the exception of transportation, qualified as nontradables.
The inflation variable turned out to be insignificant under all specifications, and was consequently dropped.
To the extent that capital-saving technical progress is embodied in the more recent vintages, this could be a partial explanation of the higher rate of capital depreciation since the late 1970s.
The use of real wage growth as the relevant wage variable resulted in somewhat lower significance levels (especially with regard to the coefficient of DRW itself), but otherwise yielded virtually identical results.
The relative productivity variable would predict a 1.8 percentage point increase in the investment-saving ratio.
Note, however, that to the extent that the increase in government spending is financed by non-lump sum taxes, it would entail distortions even if it socially desirable.