ºÃÉ«App

This paper investigates a proposal by Obstfeld and Rogoff (2000) to resolve the Feldstein-Horioka puzzle that national savings and investment are highly correlated despite apparent capital mobility. If there are real costs to international trade, then a shift in the direction of trade flows may affect interest rates and dampen current account movements, bringing savings more in line with investment. However, in a calibrated model similar to those used in Obstfeld and Rogoff's work, there is no evidence that this mechanism has an effect of any significant magnitude. Instead, the equilibrium volume of trade - which is primarily determined by the model's parameters - drives the relationship between savings and investment.