The Saving Retention Coefficient After the Advent of Euro

The Saving Retention Coefficient After the Advent of Euro The introduction of the euro marks a milestone in the process of European financial market integration. Capital mobility is helpful to cope with the loss of fiscal adjustment instruments in EMU. High capital mobility in the sense of Feldstein and Horioka can limit the negative consequences of shocks affecting the saving capacity of an economy in the Euro zone. In other words, if capital mobility is high, a country’s growth prospect will not be constrained by its ability to save. This paper empirically examines the magnitude of the saving retention coefficient in a setting of an institutionally targeted near-perfect capital mobility and capital market integration, Euro Area countries. We also try to clarify whether the adoption of the euro and the previously completed financial liberalisation has changed the slope of saving-investment association. For this purpose, the Feldstein/ Horioka approach is extended and updated. We find that the savings retention coefficient is relatively low for the whole EMS period but significantly different from zero. Also, the empirical findings support a new puzzle. Domestic saving and investment within EMU is less correlated than they were before the advent of the euro. This result does not support the Frankel’s (1992) proposition that the correlation observed between savings and investment is partly due to a non-zero currency premium. However, this result could be considered as preliminary, given the short sample size after the advent of euro. (F32, E22, G15