Aspects of Macroeconomic Saving

Abstract: This thesis deals with various aspects of macroeconomic saving. It consists of an introduction and four self-contained papers. Paper I, "From closed to open door policy: An empirical study of China's international capital mobility, 1958-98," is an empirical application of the open economy permanent income hypothesis (PIH). The purpose of this paper is to use the PIH to test and measure the degree of China's international capital mobility during the period 1958-98. In contrast to all previous known country studies using this framework, the hypothesis that capital has been at least mobile enough to allow for optimal consumption smoothing behavior is rejected. In this model, it appears that a country experiences suboptimally low capital mobility only when severe restrictions are placed on the capital account, as in the case of China. Partial barriers to international capital movements do not necessarily imply inability to smooth consumption optimally. Paper II, "The open economy excess sensitivity hypothesis: Theory and Swedish evidence," extends the theory of open economy consumption behavior by applying Flavin's (1993) excess sensitivity hypothesis (ESH) to the current account. The ESH can be interpreted as a generalization of the PIH that allows for any degree of international capital mobility. As such, the ESH can account for why the PIH fails and for the related puzzle of an "excessively volatile" current account. Furthermore, the ESH suggests an alternative approach for assessing a country's degree of international capital mobility. Using annual Swedish data for the period 1951-99, the empirical results imply that, in contrast to the PIH, the ESH cannot be rejected. The results suggest that Sweden's degree of international capital mobility is higher than the degree that is perfect according to the PIH. Paper III, "The PIH and the standard deviation ratio: A Monte Carlo Study," evaluates the coverage accuracy of small-sample confidence intervals for the standard deviation ratio summary statistic. This is the statistic that is used to test and measure the degree of international capital mobility in the PIH framework. Three methods are considered to construct the confidence intervals: the asymptotic delta method, Runkle's (1987) standard bootstrap method, and Kilian's (1998) bias-corrected bootstrap-after-bootstrap method. Monte Carlo simulations suggest that the asymptotic delta method is unreliable and that researchers should rather use bias-corrected bootstrap confidence intervals when making inference from the standard deviation ratio. Paper IV, "Has Sweden's government budget policy been too discretionary? Evidence from a generalization of the tax smoothing hypothesis," deals with the saving behavior of the government. Barro's (1979) tax smoothing hypothesis (TSH) assumes that the government is always subject to an "optimal" degree of discretion in budget policy, i.e., optimal in the sense that it minimizes the welfare costs from taxation. Paper IV proposes a generalization of the TSH that relaxes this crucial assumption. Postwar evidence for Sweden indicates that in contrast to the TSH, the generalized model provides close to a perfect fit: Tax smoothing behavior in combination with more discretion in budget policy relative to what is optimal, can explain all shifts in the central government's budget balance, including the dramatic shifts during the period 1970-96.