Perfect capital mobility has been formulated as a saving-investment comovement in each country which is statistically insignificant from zero; thus, the low correlation has been interpreted as evidence that the domestic capital market is not internationally mobile. However, this argument may be invalid in an open economy because its national income responds to changes in exchange rate. According to open economy macroeconomics, domestic income will respond to changes in the nominal exchange rate (via trade), therefore, in an open export-oriented economy, the nominal exchange rate has larger impact on GDP, so that the domestic investment and saving ratios will be statistically significant from zero. This paper evaluates this argument in terms of Taiwan, which is not only an export-oriented economy, but also has been experiencing a sequence of financial openness policies since the mid-1970s. To correct for simultaneous equation bias and accounts for the nonstationarity of the underlying time series, Johansen's procedure and a non-linear single-equation ECM are used. Strong cointegration between investment and saving ratios is identified in Taiwan which supports our hypothesis.
ASJC Scopus subject areas
- Economics and Econometrics