Testing the perfect capital mobility hypothesis
Master of Arts thesis
This thesis tests the premise that capital is perfectly mobile between countries and moves to the region of highest return. As a measure of capital mobility we use the correlation between saving and investment. Cross-country analyses by Feldstein and Horioka (1980) and Feldstein (1983) have shown high degrees of correlation between the variables implying that capital is immobile and savings remains in the home country. The earlier analysis is extended to more recent time-periods using cross-country data for 45 countries. Capital market rigidities are shown to persist into the 80's for industrialized countries. But developing countries show greater dependence on foreign funds. Analyses of individual countries exhibit the same dependence on own funds for industrial countries while developing countries have lower correlation coefficients between savings and investment. In general the results of this thesis confirm that while capital is internationally mobile barriers do exist to inhibit the flow.