Domestic Savings and International Capital Flows in the EU

Abstract

This paper uses new statistical estimates to test for effects of economic integration in Europe on international capital mobility. In a world of perfect capital mobility, one should experience little or not statistically significant relationship between the amount of domestic savings and domestic investment. Alternatively, under less-than perfect capital international mobility, diverse portfolio preferences and country-specific transactions costs would create impediments for long-term capital flows. This would result in direct connection between any changes (increases) in domestic savings and domestic investment. According to empirical results of a similar empirical study by Feldstein and Horioka (1980) for developed countries (including some of current EU members included in this investigation), there were portfolio preferences and institutional rigidities, which resulted in almost equal corresponding differences in domestic investment rates driven by domestic savings rates among major industrial countries. The current study tests for capital mobility in the EU Member States (2010-2020) discussing compatibility of findings with previous evidence found in the literature (Feldstein and Horioka 1980). It also addresses the optimal national savings policy, tax incidence and concludes on capital formation in the EU.