Capital Mobility in the 1980s

Feldstein and Horioka upset conventional wisdom in 1980 when they con-cluded that changes in countries ’ rates of national saving had a very large effect on their rates of investment, and interpreted this finding as evidence of low capital mobility. Although their regressions have been subject to a great variety of criticisms, their basic finding seems to hold up. But does it imply imperfect capital mobility? Let us begin by asking why we would ever expect a shortfall in one coun-try’s national saving not to reduce the overall availability of funds and thereby crowd out investment projects that might otherwise be undertaken in that country. After all, national saving and investment are linked through an iden-tity. (The variable that completes the identity is, of course, the current account balance.) The aggregation together of all forms of “capital ” has caused more than the usual amount of confusion in the literature on international capital mobility. Nobody ever claimed that international flows of foreign direct investmen