Exploring the effects of capital mobility on the saving–investment nexus:evidence from Icelandic historical data

• Published in: Scandinavian Economic History Review
• Main Authors: Raza, Hamid, Zoega, Gylfi, Kinsella, Stephen
• Format: Article in Journal/Newspaper
• Language: English
• Published: 2019
• Subjects: Feldstein–Horioka puzzle; capital mobility; financial crisis; Iceland
• Online Access: https://vbn.aau.dk/da/publications/45a0d978-0703-4afd-a402-96ffd1260749; https://doi.org/10.1080/03585522.2018.1529615; https://vbn.aau.dk/ws/files/336922844/29717.pdf; http://www.scopus.com/inward/record.url?scp=85056141440&partnerID=8YFLogxK

We explore the effects of capital mobility on the relationship between saving and investment using historical data for Iceland. First, we analyse the saving–investment (S-I) correlation for the period of restricted capital mobility using data from 1960 and 1994. We then add a period of free capital mobility between 1994 and 2008 and estimate the correlation for the period 1960–2008. Finally, we extend our analysis to the 2008 to 2016 period, when capital controls were imposed in response to the crisis. Institutions matter: We find institutional changes, in particular, Iceland’s entry into the European Single Market in 1994, coincided with a fall in the long-run correlation between saving and investment. However, the correlation weakens further when we include the post-crisis regime of capital controls, suggesting a weaker relationship between savings and investment in this regime. We discuss the possible reasons for this pattern and also the implications of our findings for post-crisis policy in small open economies.