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The dynamics among domestic saving, investment, and the current account balance in the USA: a long-run perspective

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Abstract

We use time series methods to analyse the long- and short-run dynamics and inter-relationships between government savings, private savings, investment, and the current account balance in the USA for the period 1947Q1–2017Q3. We control for the impact of the nonlinear dynamics of GDP growth over the business cycle on the evolution of these variables. A few important results stand out. The relationships among the variables are time varying as we find three structural periods: (I) 1947Q1–1984Q3, (II) 1984Q4–1999Q4, and (III) 2000Q1–2017Q3. The impact of nonlinearities in GDP growth matters in each period, but the twin deficit hypothesis is supported only in the first period. Generally, we also find no evidence to conclude that the Ricardian equivalence hypothesis holds over the full sample period. Finally, we cannot conclude that the Feldstein–Horioka puzzle with respect to private or government savings holds over the three structural periods.

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Fig. 1

Source US Bureau of Economic Analysis (2018)

Fig. 2

Source Authors’ calculation using data from the US Bureau of Economic Analysis (2018)

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Notes

  1. We follow and modify the final set of equations presented in Olivei (2000).

  2. See Mann (2002) for a discussion on the sustainably of the US current account deficit and if it should matter.

  3. The discussion of the first three of these shocks is based on the discussion in McKibbin and Stoeckel (2005).

  4. For example see Penati and Dooley (1984), Dooley et al. (1987), Obstfeld (1986), Feldstein and Bachetta (1991) and Baxter and Crucini (1993). See also Tesar (1991), Coakley et al. (1998) and Apergis and Tsoumas (2009) for an extensive survey on the Feldstein–Horioka puzzle.

  5. The correlation between saving and investment has been one of the interesting themes in international economics since Feldstein and Horioka (1980). We calculated the correlation between saving and investment as a share of GDP for the three periods as follows: 0.739 (1947Q1–1984Q3), 0.714 (1984Q4–1999Q4) and 0.636 (2000Q1–2017Q3).

  6. We also conducted the Augment Dickey Fuller (ADF) tests. The conclusions were the same as the PP test.

  7. The inference drawn from the unit root tests were invariant to the inclusion or exclusion of the intercept and trend.

  8. The long run coefficients can be estimated using the autoregressive distributed lag (ARDL) technique (proposed by Pesaran and Shin (1999) and Pesaran et al. (2001) while imposing appropriate restrictions). We recognize the importance of long run coefficients; however, this is beyond the scope of this paper, and hence, left for future research.

  9. We also ran the VECM without the CDR effect term, but the results were basically unchanged.

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Authors and Affiliations

  1. Department of Economics, Business, and Mathematics, King’s University College at Western University, 266 Epworth Avenue, London, ON, N6A 2M3, Canada

    Adian McFarlane

  2. Department of Economics, Justice, and Policy Studies, Mount Royal University, 4825 Mount Royal Gate SW, Calgary, AB, T3E 6K6, Canada

    Young Cheol Jung & Anupam Das

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  1. Adian McFarlane
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  2. Young Cheol Jung
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Correspondence to Anupam Das.

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Young Cheol Jung declares that he has no conflict of interest. Adian McFarlane declares that he has no conflict of interest. Anupam Das declares that he has no conflict of interest.

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McFarlane, A., Jung, Y.C. & Das, A. The dynamics among domestic saving, investment, and the current account balance in the USA: a long-run perspective. Empir Econ 58, 1659–1680 (2020). https://doi.org/10.1007/s00181-018-1566-9

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