globalization and the feldstein–horioka puzzle
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Globalization and the Feldstein–Horioka puzzleJaved Younas a & Debasish Chakraborty aa Department of Economics , Central Michigan University , Mount Pleasant, MI 48859, USAPublished online: 04 Jan 2010.
To cite this article: Javed Younas & Debasish Chakraborty (2011) Globalization and the Feldstein–Horioka puzzle, AppliedEconomics, 43:16, 2089-2096, DOI: 10.1080/00036840903035985
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Applied Economics, 2011, 43, 2089–2096
Globalization and the
Feldstein–Horioka puzzle
Javed Younas* and Debasish Chakraborty
Department of Economics, Central Michigan University, Mount Pleasant,
MI 48859, USA
Capital account liberalization and the integration of world financial
markets should increase capital mobility across countries. This article uses
the Feldstein–Horioka savings–investment methodology to examine the
impact of economic globalization on the degree of capital mobility in 99
countries over the period 1970 to 2005. Our findings suggest that economic
openness and financial market integration have led to increased capital
mobility in developed as well as developing countries. However, their effect
appears to be larger for the latter. This also implies that countries with
more financial openness can run higher current account deficits due to
better access to external capital markets. Our results also support the
previous findings that foreign aid supplements domestic savings for
investment in developing countries.
I. Introduction
Feldstein–Horioka (1980), hereafter FH, interpret
their findings of strong correlation between domestic
savings and domestic investment as an evidence of
capital immobility among Organization for
Economic Cooperation and Development (OECD)
countries. This finding led to the controversial
conclusion of the existence of significant home bias
in the way domestic savings are allocated. This
received much attention in the literature as it went
against conventional wisdom of significant movement
of capital across national boundaries. In the face of
financial liberalization and economic openness, FH’s
finding of capital immobility among developed
countries came to be known as ‘the mother of all
puzzles’ (Obstfeld and Rogoff, 2000).1 In addition,
FH conclusion has significant policy implications
since if domestic investment is closely associated
with domestic savings, then policies designed to
augment domestic savings would lead to increased
domestic investment. If, however, they are not closely
associated then policies to impact domestic invest-
ment through domestic savings will not be effective
(Schmidt, 2003).This article concedes that there will inevitably be
some home bias in the allocation of domestic savings
due to barriers to entry, information cost, and
attitude towards risks in investing in international
portfolios. The question that this article finds more
germane to the issue is whether the savings retention
coefficient declines over time due to economic
*Corresponding author. E-mail: [email protected] Later research finds high savings–investment correlation in large as well as small economies, although this correlation forsmall economies is weaker (Dooley et al., 1987; Wong, 1990; Mamingi, 1997; Vamvakidis and Waczairg, 1998; Coakley et al.,1999; Kasuga, 2004). Sinha and Sinha (2004) examine capital mobility for developed as well as developing countries and findthat capital is more mobile for countries with a low per capita income. The findings of relatively higher capital mobility indeveloping countries have mainly been attributed to the integration of world financial markets and capital accountliberalization.
Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online � 2011 Taylor & Francis 2089http://www.informaworld.com
DOI: 10.1080/00036840903035985
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openness across the world.2 High savings–investment
correlation can arise from excessive capital control
which inhibits the cross-border movement of port-
folio and direct investment. On the other hand,
capital market liberalization opens greater opportu-
nities for domestic savings to be financed wherever it
can earn highest marginal returns in the world. It can
be argued that high savings–investment correlation is
due to the omission of relevant variables and as such
not an evidence of significant home bias. Therefore,
the empirical models that do not account for financial
openness and economic globalization would result in
an upward bias on savings retention coefficient, thus
understating the degree of capital mobility than is
actually the case.A few recent panel studies employing an augmented
FH specification conclude that the financial markets
liberalization has increased capital mobility in devel-
oping countries (Isaksson, 2001; Georgopoulos and
Hejazi, 2005; Payne and Kumazawa, 2005; Younas,
2007). These studies use the interactive variable of
time trend and savings rate as a proxy for financial
market liberalizations over time. For example,
Georgopoulos and Hejazi (2005), using annual data
for OECD countries, demonstrate that home bias in
the allocation of domestic savings has fallen through
time. They do so by introducing a time trend in the
following panel data model:
iit ¼ �0 þ �1sit þ �ðsittÞ þ �it ð1Þ
where iit is the ratio of domestic investment to Gross
Domestic Product (GDP), sit is the ratio of domestic
savings to GDP and t is the time trend. The home
bias is measured by (�1þ �t). They argue that
(�1þ �t)40, but it should fall over time since �50.We argue that economies have become more open
and financially integrated over time, and in the
estimation of the FH equation, this important fact
needs to be recognized. This article contributes to the
literature in a significant way by incorporating three
major improvements over other research: (1) instead
of using time trend, we introduce Dreher (2006)
globalization index as a formal measure of economic
openness and financial markets integration to exam-
ine its impact on the degree of capital mobility in
99 countries over the period 1970 to 2005;3 (2) we
incorporate official development assistance in the
augmented FH equation for developing countriessince, for them, foreign aid increases the overallavailability of savings for domestic investment; (3) interms of estimation techniques, this article uses thedynamic panel Generalized Method of Moments(GMM) estimator proposed by Arellano and Bond(1991) to improve upon the previous literature.4 Thistechnique addresses a host of estimation issues andcritiques have argued that ignoring those wouldincrease the savings retention coefficient.
Our findings suggest that economic globalizationhas led to increased capital mobility over time indeveloped as well as developing countries. However,their effect appears to be larger for the latter. Thisalso implies that countries with more financialopenness can run higher current account deficitsdue to better access to external capital markets.Foreign aid also appears to supplement domesticsavings for investment in developing countries.
The remainder of this article proceeds as follows.The next section describes the empirical methodologyand data. Section III presents the estimation results,while Section IV concludes.
II. Empirical Methodology and Data
Using long-run data averages, FH estimated a cross-section regression equation of the following form for16 OECD countries over the period 1960 to 1974:
I
Y
� �i
¼ �þ �S
Y
� �i
þ�i ð2Þ
where I is investment, S is savings and Y is the GDPfor country i. According to FH, an estimate of � closeto 1 reflects perfect capital immobility, while thatclose to 0 indicates perfect capital mobility. FHestimates the savings retention coefficient (the coef-ficient on savings rate) to be between 0.8 and 0.9, anevidence of high degree of capital immobility andstrong home bias in the allocation of domesticsavings.
On a technical level some researchers have founda problem with FH using cross-sectional data forestimating savings–investment relation. Krol (1996)argues that his use of fixed effect panel data has
2 The coefficient on savings rate is also called savings retention coefficient as it shows the extent to which an increase indomestic savings is used to finance domestic investment or, in other words, the fraction of a dollar savings that is investeddomestically (Georgopoulos and Hejazi, 2005).3 The time trend would be a weak indicator of economic openness and financial integration as it may also capture otherfactors such as business cycle effects, changes in policy regimes, etc.4Despite the advantage of this technique in terms of correcting potential endogeneity in the model, dynamic panel GMM hashardly been used to study capital mobility in the FH literature.
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allowed him to control for both country specific and
time period effects. Once these effects are controlled,
Krol demonstrates that the savings retention coeffi-
cient is significantly lower than previously found.
Past literature also attributes the lower estimates for
the savings retention coefficient to the inclusion of
Luxembourg in the studies of OECD countries
(Hussein, 1997; Coiteux and Oliver, 2000). They
argue that the coefficient on savings rate increases in
the Krol article if Luxembourg is excluded. However,
Ho (2002) concludes that the inclusion or exclusion
of Luxembourg does not affect the estimation results,
but what matters is the estimation technique to derive
the results. Corbin (2001) also emphasized the need
to move away from Ordinary Least Square (OLS) to
controlling country specific effects. She uses panel
data and concludes that the high savings retention
coefficient is not an evidence of lack of capital
mobility, but is attributable to the existence of
country specific effects. Keun-Yeob et al. (1999) use
panel data to increase the power of the unit root test,
but still found that the FH coefficient exhibited
significant home bias.The choice of our econometric model is essentially
based on the following set of concerns: (i) the
potential endogeneity of domestic savings; (ii) the
dynamic relationship between domestic savings and
investment as both are impacted by the prior values
of each other; and (iii) unobserved country-specific
effects. These concerns lead us to utilize the dynamic
panel GMM estimator proposed by Arellano and
Bond (1991) to overcome these potential issues.
According to this technique, the model is transformed
into two-step GMM estimator to eliminate the fixed
effects.5 Under this transformation, the lagged values
of the endogenous variables are used as suitable
instruments to overcome the potential endogeneity
problem.6 In addition, we take 1 year lagged values of
all independent variables in our model. Intuitively,
this makes more economic sense because it takes timefor savings to be transformed into fixed capitalformation, which is used to measure investment. Thistechnique also overcomes any likely problem ofcontemporaneous correlation.7 Consequently, invest-ment data is over the period 1971 to 2005, while thedata for all independent variables is from 1970 to2004. Using the augmented FH specifications, weestimate the following two transformed models infirst differences:
(a) Full sample and OECD countries, separately:
I
Y
� �it
¼ �0 þ �1I
Y
� �i,t�1
þ �2S
Y
� �i,t�1
þ �3ðGÞi,t�1
þ �4 G�S
Y
� �� �i,t�1
þ�it ð3Þ
(b) Developing countries:
I
Y
� �it
¼ �0 þ �1I
Y
� �i,t�1
þ �2S
Y
� �i,t�1
þ �3ðGÞi,t�1
þ �4 G�S
Y
� �� �i,t�1
þ �5A
Y
� �i,t�1
þ �it ð4Þ
where subscripts i and t indicate country and timeperiod, respectively. The intercept includes a compo-nent, �0(�0), that is common to all recipient countries.All variables, except G (a globalization index), aredefined as a ratio to GDP. I is the gross fixed capitalformation used to measure investment, S is grossdomestic savings and A is the official developmentassistance used to measure foreign aid. Saving iscalculated as GDP minus private and governmentconsumption.8,9 Data for all variables, except forglobalization index, is taken from World BankDevelopment Indicators (WDI, 2007).
This article explicitly uses KOF globalization indexof Dreher (2006) as a formal measure of economic
5 In the presence of fixed effects, the lagged endogenous determinants will correlate with the error term, resulting in biased andinconsistent estimates for a panel with large cross-sections and short time periods.6One may plausibly argue that savings is endogenous as it not only affects but may also be affected by investment. Therefore,in order to get consistent estimate we need to employ Two-Stage Least Square (2SLS) method. The problem with thisapproach is nonavailability of valid instruments and their data, especially for the developing countries. Isaksson (2001) usedgovernment consumption expenditures and dependency ratio (sum of the population ages between 0–14 and 65 and abovedivided by labour force of a country) as instruments for the savings rate. However, they are not valid instruments in our studydue to their very weak correlation with the savings rate. The dynamic panel estimation technique in our study overcomes thisconcern.7 For every regression, we also checked the conditions of both validity of instruments and the absence of serial correlation inresiduals.8 Isaksson (2001) points out two reasons for using gross savings over net savings: (i) it is gross savings that moves betweencountries and (ii) the accounting definitions of depreciation differs across countries.9Gross fixed capital formation, as defined in WDI (2007), consists of outlays on additions to the fixed assets of the economy,net changes in the level of inventories, and net acquisitions of valuables. Past studies consistently use gross fixed capitalformation as a measure of investment because it does not include highly procyclical components of inventories (Bayoumi,1990; Sinha and Sinha, 2004; Payne and Kumazawa, 2005; Younas, 2007).
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openness and financial markets liberalization. TheKOF globalization index is a weighted average ofeconomic, political and social globalization.Economic globalization is a weighted index ofactual economic flows (both trade and capitalflows), and the index of restrictions on trade andcapital flows. Political globalization is a weightedindex of political openness and integration with therest of the world, and is measured loosely bythe number of embassies the country has, thenumber of international organizations the countrybelongs to and the number of peacekeeping missionthe country has participated in. Social globalizationis a weighted index of personal contacts, informationflows and cultural proximity. Economic globalizationserves the purpose of our study more directly.Therefore, we use both overall globalization indexand economic globalization index separately in theregressions.
The interactive variable, G� ðS=YÞ, is introducedto examine the impact of increasing overall andeconomic globalization over time on the degree ofcapital mobility. Theoretically, lower barriers on themovement of capital and increased financial marketintegration should increase the degree of capitalmobility. Hence, we expect a negative and significantvalue for this interaction term. The partial effect ofsavings on investment (�2þ �4G (Equation 3) and�2þ�4G (Equation 4)) will be evaluated at both meanand higher value of globalization index to show that,with increased globalization, the savings retention
coefficient falls. It is expected that �2(�2)40, while�4(�4)50.
In addition, following Montiel (1994) the modelincludes the effect of foreign aid when estimatingsavings–investment correlation because domesticinvestment in developing countries may also dependon the amount of foreign assistance they receive. Ifforeign aid is important, but omitted, the coefficientof savings rate will have a downward bias, implyinghigher capital mobility (Isaksson, 2001). An econo-metric analysis of investment and capital mobility islikely to suffer from business cycle effects and, giventhe procyclical nature of the investment-to-GDPratio, the use of annual data can impart a biasupon the estimated coefficients (Bayoumi, 1990).Therefore, we follow the standard practice of taking5-year data averages for all the variables to removesuch cyclical effects (Vamvakidis and Wacziarg, 1998;Isaksson, 2001; Kasuga, 2004; Younas, 2007).10
Table 1 lays out descriptive statistics for the data setover the sample period. The average investment ratesover the sample period is 20.9% with a maximum of45.8% (Singapore) and a minimum of 4.6% (Chad).The average savings rate is 19.2% with a maximum of79.2% (United Arab Emirates) and a minimum of�13.9% (Jordan). Negative savings for developingcountries can arise due to current account deficitsand/or government budget deficits. Current accountdeficits imply that consumption and investment of acountry cannot be funded domestically and that acountry is a net borrower in the international market.
Table 1. Descriptive statistics
Variables Obs. Mean SD Minimum Maximum Index range
All countriesInvestment rates 693 20.88 6.34 4.6 45.8 –Savings rate 693 19.19 11.92 �13.9 79.2 –Globalization 693 43.85 18.18 8 92.7 0–100Economic globalization 630 47.84 19.70 7.9 95 0–100
OECD countriesInvestment rates 168 22.62 4.09 13.7 37.1 –Savings rate 168 23.27 5.26 11.8 39.6 –Globalization 168 65.45 15.82 28.8 92.7 0–100Economic globalization 168 64.34 16.20 28.3 95 0–100
Developing countriesInvestment rates 525 20.14 7.12 3.9 47.7 –Savings rate 525 17.89 13.10 �13.9 79.2 –Globalization 525 36.94 12.62 8 83 0–100Economic globalization 462 41.85 17.29 7.9 94.9 0–100Foreign aid 490 5.36 6.44 0 34.6 –
Notes: Higher value of a globalization index corresponds to more openness. Investment rate, savings rate and foreign aid aretaken as a ratio to the GDP of a country.
10Data for all variables is broken into separate 5-year data averages. Therefore, there are a total of seven time periods.
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The average globalization index is 43.85 pointswith a maximum of 92.7 (Belgium) and a minimum of8.0 (Bangladesh), while the average economic globa-lization index is 47.8 points with a maximum of 92.7(Ireland) and a minimum of 7.9 (Bangladesh). Themean values of overall globalization and economicglobalization indices suggest that the trade barriersand restrictions on the movement of capital are farless in OECD countries than in developing countries.On the other hand, Fig. 1 reveals an upward trend inthe overall globalization around the world over time.
III. Estimation Results
Table 2 presents the results for basic FH equationand does not include globalization and its interactionterm with the savings rate. The coefficient on the
savings rate is positive and significant at 1% level in
all the regressions for full sample, OECD and
developing countries. As in FH, the savings rate is
significant, although not unity. This shows that the
concessions regarding some home bias is valid.
However, its magnitude is relatively smaller for
developing countries, suggesting that capital is more
mobile in developing countries compared to OECD
countries. This finding is also consistent with the
previous studies, indicating paucity of investible
funds in developing countries and their dependence
on foreign capital inflows. The positively significant
coefficient of foreign aid suggests that investment in a
developing country is also supported by the amount
of foreign assistance it receives. Interestingly, with
the inclusion of foreign aid, the magnitude of the
coefficient of savings rate increases, implying a lower
degree of capital mobility. So, if foreign aid is omitted
Table 2. Arellano–Bond GMM estimations; dependent variable: Investment Rates
Independent variables All 99 countries 24 OECD countries 75 developing countries 70 developing countries
Investment Ratesi,t�1 0.525 (7.08)*** 0.219 (4.58)*** 0.467 (5.78)*** 0.403 (5.01)***Savings Ratei,t�1 0.246 (5.56)*** 0.499 (11.98)*** 0.195 (4.43)*** 0.232 (4.48)***Foreign Aidi,t�1 – – – 0.201 (3.11)***Sargan test ( p-value)a 0.005 0.113 0.003 0.008Wald chi-square 104.10 211.56 69.69 102.61Serial correlation
test ( p-value)b0.278 0.585 0.340 0.284
Observations 495 120 375 350
Notes: Absolute t-values are shown in parentheses.aThe null hypothesis is that the instruments are not correlated with the residuals.bThe null hypothesis is that the error term in the first difference regression exhibits no second order serial correlation.*** Indicates significance at 1% level.
0
10
20
30
40
50
60
70
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Years
Glo
baliz
atio
n
Fig. 1. Globalization in the world
Source: KOF globalization index of Dreher (2006).
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from the FH regression for developing countries, thecoefficient of savings rate would exaggerate thedegree of capital mobility.
Now we turn our focus on the key variable of ourinterest. Table 3 shows that an increase in overallglobalization has a positive and significant impact oninvestment rates for developed as well as developingcountries. However, its effect appears to be larger forthe latter. This also suggests that countries with moreeconomic openness can run larger current accountdeficit due to more access to external capital market.Access to external capital can make up for shortfallin their domestic savings for investment, which canespecially help developing countries grow fasterduring the development phase (Prasad et al., 2006).
As expected, the interaction effect of globalizationand savings rate is negative and significant in all theregressions for both OECD and developing countries.This result is perfectly consistent with our theoreticalunderstanding that with increased economic andfinancial integration, capital often flows to invest-ments promising the highest marginal returns, andthis contributes to the decline in the savings retentioncoefficient. To measure the actual size of the savingsretention coefficient, we calculate the Marginal Effectof Savings (MES) on investment. We evaluate themarginal effect of domestic savings (MES) on
investment at both mean value of the globalizationindex and a hypothetical level of 25% higher than themean value of the globalization index. We do thisto show that, with increased globalization, savingsretention coefficient falls. The results in Table 3shows that the savings retention coefficients forOECD countries evaluated at the mean and at thevalue 25% higher than the mean value of globaliza-tion index are 0.48 and 0.40, while for developingcountries those are 0.26 and 0.17, respectively. Thissuggests that savings–investment correlation weakenssubstantially as economies become more integratedand the restrictions on the cross-border movement ofcapital decline in developing countries. On the otherhand, the size of the coefficient of savings rate forOECD countries witnesses a marginal decline.
Since economic globalization measures the actualeconomic flows as well as the restrictions on tradeand capital movements, it serves the purpose of ourstudy more directly. The results in the Table 4 suggestthat economic globalization has a larger effect on theinvestment in developed as well as developingcountries. The savings retention coefficients forOECD countries evaluated at the mean and at thevalue 25% higher than the mean value of economicglobalization index are 0.47 and 0.34 while fordeveloping countries those are 0.19 and 0.12,
Table 3. Arellano–Bond GMM estimations; dependent variable: Investment Rates
Independent variablesAll 99countries
24 OECDcountries
75 developingcountries
70 developingcountries
Investment Ratesi,t�1 0.515 (6.20)*** 0.186 (2.45)** 0.403 (4.80)*** 0.358 (4.49)***Savings Ratei,t�1 0.438 (3.97)*** 0.806 (6.18)*** 0.570 (4.84)*** 0.631 (4.92)***Globalizationi,t�1 0.306 (4.47)*** 0.290 (7.84)*** 0.411 (5.81)*** 0.450 (6.18)***(Globalization�Savings Rate)i,t�1 �0.005 (2.11)** �0.005 (2.82)*** �0.009 (3.66)*** �0.010 (3.82)***Foreign Aidi,t�1 – – – 0.268 (3.90)***Sargan test ( p-value)a 0.013 0.216 0.008 0.025Wald chi-square 183.47 399.37 167.91 204.94Serial correlation 0.249 0.609 0.395 0.466Test ( p-value)b
Observations 495 120 375 350
AMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G 0.218 0.479 – –
BMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G 0.164 0.396 – –
CMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G – – 0.238 0.262
DMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G – – 0.154 0.169
Notes: Absolute t-values are shown in parentheses.A and B: Marginal effect of savings on investment evaluated at mean and at the value 25% above the mean value ofglobalization index, respectively, as in Equation 3; C and D: Marginal effect of savings on investment evaluated at mean andat the value 25% above the mean value of globalization index, respectively, as in Equation 4.aThe null hypothesis is that the instruments are not correlated with the residuals.bThe null hypothesis is that the error term in the first difference regression exhibits no second order serial correlation.*** and ** indicate significance at 1 and 5% levels, respectively.
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respectively. This suggests that home bias in theallocation of domestic savings has declined withincreased capital market liberalization and financialintegration in the world. As world financial marketintegrates and countries lower restrictions on themovement of capital, domestic investment not onlydepends on domestic savings but is financed by thepool of world savings. This weakens the correlationbetween domestic savings and domestic investmentwhich, in FH sense, implies a higher degree of capitalmobility.
Additionally, the positively significant coefficientof foreign aid suggests that it supplements domesticsavings for investment in developing countries. Themagnitude of the coefficient of savings rate alsoincreases with the inclusion of foreign aid. Thissuggests that if foreign aid is important but omitted,the estimated coefficient on savings rate wouldexaggerate the degree of capital mobility than isactually the case.
IV. Conclusion
FH interpreted high savings–investment correlationas an indication of low capital mobility across
national boundaries. According to FH, an economy
with low capital mobility will have a slope coefficient
with the savings rate close to unity, and close to zero
with high capital mobility. Economic openness and
financial market integrations lower restrictions on the
movement of capital across borders and, thus domes-
tic investment is financed by the world pool of
savings. This would weaken the savings–investment
correlation in a country.This article assumes that some home bias in the
allocation of domestic savings is inevitable, and so the
real question is whether the savings retention coeffi-
cient declines with economic openness. This article
uses KOF globalization index of Dreher (2006) as a
formal measure of economic openness and financial
markets integration to examine its impact on the
degree of capital mobility in 99 countries over the
period 1970 to 2005. We utilize the dynamic panel
(GMM) estimator proposed by Arellano and Bond
(1991) to address the host of estimation issues.
Estimation results indicate that economic globaliza-
tion has led to increased capital mobility over time in
developed as well as developing countries. However,
its effect appears to be larger for the latter. This also
implies that countries with more financial openness
can run higher current account deficits due to better
Table 4. Arellano–Bond GMM estimations; dependent variable: Investment Rates
Independent variables 90 countries24 OECDcountries
66 developingcountries
63 developingcountries
Investment Ratesi,t�1 0.502 (6.25)*** 0.160 (2.95)*** 0.362 (4.57)*** 0.354 (5.15)***Savings Ratei,t�1 0.352 (3.32)*** 1.060 (8.57)*** 0.419 (3.97)*** 0.488 (4.28)***Economic Globalizationi,t�1 0.153 (3.11)*** 0.222 (7.99)*** 0.238 (4.90)*** 0.214 (4.43)***(Economic Globalization�
Savings Rate)i,t�1
�0.004 (1.88)* �0.009 (5.16)*** �0.006 (3.21)*** � 0.007 (3.35)***
Foreign Aidi,t�1 – – – 0.211 (2.36)**Sargan test ( p-value)a 0.019 0.292 0.007 0.028Wald chi-square 136.11 648.61 102.38 133.87Serial correlation test ( p-value)b 0.702 0.745 0.957 0.973Observations 450 120 330 315
AMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G 0.161 0.473 – –
BMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G 0.113 0.336 – –
CMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G – – 0.168 0.194
DMES :@ ðI=YÞ
@ ðS=YÞ¼ �2 þ �4G – – 0.105 0.122
Notes: Absolute t-values are shown in parentheses.A and B: Marginal effect of savings on investment evaluated at mean and at the value 25% above the mean value of economicglobalization index, respectively, as in Equation 3; C and D: Marginal effect of savings on investment evaluated at mean andat the value 25% above the mean value of economic globalization index, respectively, as in Equation 4.aThe null hypothesis is that the instruments are not correlated with the residuals.bThe null hypothesis is that the error term in the first difference regression exhibits no second order serial correlation.***, ** and * indicate significance at 1, 5 and 10% levels, respectively.
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access to external capital markets. Our results alsosupport the previous findings that foreign aidsupplements domestic savings for investment indeveloping countries.
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