Capital Mobility in OECD Countries: A Multi-Level Factor Approach to Saving–Investment Correlations

While a high saving–investment correlation is one of the most robust empirical regularities in international economics, there has been debate about whether it can be interpreted as evidence of barriers to international capital flows. When global and country-specific shocks shift saving and investment in the same direction, the high saving–investment association may be observed even in perfectly integrated international financial markets. In order to get an unbiased measure of capital mobility, controlling for the multi-level common factors is crucial. We estimate the global and country-specific factors from a large panel of macroeconomic series in the OECD countries using a multi-level factor analysis, and then explicitly control for them in the saving–investment regression. We show that the global and country-specific factors together account for almost 50% of the saving–investment correlation in the panel of 19 OECD countries for 1961–2005, and capital mobility appears to increase over time particularly in Europe. JEL Classification Number: C23, F32, F41