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Empirical Economics

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01-06-2014

Savings and investments in the OECD: a panel cointegration study with a new bootstrap test

Authors: Francesca Di Iorio, Stefano Fachin

Published in: Empirical Economics | Issue 4/2014

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Abstract

In this paper we test for the existence of a stable long-run savings–investments relationship in 18 OECD economies over the period 1970–2007. Although individual modelling provides only very weak support to the hypothesis of a link between savings and investments, this cannot be ruled out as individual time series tests may have low power. We thus construct a new bootstrap test for panel cointegration robust to short- and long-run dependence across units. This test provides evidence of a long-run savings–investments relationship in most of the countries, with USA the most notable exception. However, the elasticities generally smaller than 1 suggest that market imperfections mostly cause only partial home biases.

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Austria, Australia, Belgium, Canada, Denmark, Finland, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Portugal, Sweden, UK and USA.

The survey by Apergis and Tsoumas (2009) lists nearly 200 references.

Since ratios are constrained to lie in the [0,1] interval deterministic trends are out of question, and the tests include only a constant.

The DOLS estimate of the coefficient is -4.32, with a standard error of 0.65, while the FM-OLS estimate is \(-\)2.97, with a standard error of 0.40.

Note that the entire vector of \(T\) block lengths will be used only if \(L_{t} = 1\; \forall t\), a highly unlikely case which in principle cannot nevertheless be ruled out. Typically the number of blocks chained will be much smaller than \(T\).

It may also be added that any proof of validity under dependence will be confined to some specific dependence structure, leaving open the question for other structures.

Note that, although for simplicity we consider here the case of a single right-hand side variable, the algorithm is trivially generalised to the case of multivariate models.

Chang and Nguyen (2012) consider also a test based on the minimum, claimed to be best suited to detect the case of cointegration holding in a small fraction of the units. Our procedure can obviously automatically handle this case, but since we do not believe it to be an empirically interesting hypothesis (in fact, it could be argued that in this case the panel is best defined as not cointegrated) we will not examine it.

Exploratory simulations showed the performances of the test to be independent on the number of independent variables.

Consistent with the tendency to overreject the \(\text{ Max }_\mathrm{HEG}\) test its \(p\)-value is slightly smaller than both the other \(p\)-values. To check the robustness of the results we also computed the tests with other mean block lengths, more precisely 4 and 8, obtaining \(p\)-values differing atmost by 0.02 from those reported here.

In other terms, we compute tests with fixed null and alternative hypotheses (respectively, \(H_{0}\):‘cointegration in no unit’ and \(H_{1}\):‘cointegration in all units’) on a sequence of nested panels of increasing size. Standard sequential tests, such as those proposed by Smeekes (2010), keep sample size and \(H_{0}\) fixed, and change systematically \(H_{1}\) (here: in step 1 ‘cointegration at least in units 1–5’, in step 2 ‘cointegration at least in units 1–6’, etc.).

Other approaches are described by Hanck (2009) and Smeekes (2010).

FM-OLS delivers a broadly consistent picture. Very few contrasting point estimates are easily explained by the rather large standard errors.

Three more countries were dropped from the analysis: Greece, where the two variables have been linked by an inverse relationship not compatible with the FH set-up, the Netherlands and Portugal, where the investment/GDP ratios appear stationary while savings/GDP do not.

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Title: Savings and investments in the OECD: a panel cointegration study with a new bootstrap test
Authors: Francesca Di Iorio
Stefano Fachin
Publication date: 01-06-2014
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2014
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-013-0722-5

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