The Dynamics of Currency, Savings, and Investment Rates

Mohamed A. Ayadi, Walid Ben Omrane, Skander Lazrak and Jie Yang

International Review of Finance, 2018, vol. 18, issue 1, 3-33

Abstract: This paper examines the dynamic relations among foreign exchange rates, savings, and investment ratio for a sample of 25 countries from the Organization for Economic Cooperation and Development. We find that the savings rate and the investment rate are cointegrated of order (1, −1). This result is consistent with the literature on the savings–investment relations and therefore confirms the validity of the Feldstein–Horioka puzzle. Using country†specific and longitudinal panel vector autoregressive models, we show that historical savings–investment differentials do not help explain foreign exchange rates. We demonstrate, however, that foreign exchange rates and trade balance ratio impact the difference between savings and investments. Specifically, depreciation in the domestic currency would cause the savings–investment difference to widen.

Date: 2018
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