The Saving–Investment Relationship Re-visited: Capital Mobility and Current Account Deficit Sustainability

The study examines the degree of current account deficit (CAD) sustainability and capital mobility for a panel of 97 countries over the period 1980–2020. To this end, the study adopts a novel interpretation of the Feldstein–Horioka coefficient in the context of CAD sustainability and examines the relationship between savings and investment using the Dynamic Common Correlated Effects Mean Group (DCCEMG) estimator. The findings reveal that all country groups exhibit “weakly” sustainable CADs. The estimates of the short-run coefficients reveal that short-run capital mobility is high in all country groups, whereas long-run capital mobility is relatively moderate or low. The rolling-window analysis shows that the 2007–2008 global financial crisis caused a significant drop in both capital mobility and CAD sustainability. In the post-crisis period, short-run capital mobility and CAD sustainability remained on a downward trend in most regions, whereas long-run capital mobility started slowly recovering. By providing a comprehensive regional analysis across six major world regions, this study contributes to the literature by shedding light on the evolving dynamics of international capital flows and regional variations in external balance sustainability.