Saving, Investment and Intra-national Capital Mobility in Korea

This paper estimates intra-regional capital mobility by analyzing savings-investment correlations for 16 individual metropolitan cities and provinces in Korea during 1998~2011. The empirical analysis shows that the coefficient of the saving rate on the investment rate is close to zero and exhibits low statistical significance. When explanatory variables such as a common productivity shock within a region, a large scale economy effect, and the nationwide external shocks such as the Asian currency crisis and the global financial crisis are added to the model, they appear to have the expected significant effects on the investment rate. However, the estimated coefficient of the saving rate does not differ much. Next, we analyze the sectoral relationships between savings and investment during 2010~2011 when data are available. The savings-investment relationships for the government and corporate sectors appear to be comparatively high and significant, while that for the household sector is very low and insignificant. In short, the Feldstein and Horioka (FH) puzzle does not seem to be a severe problem for domestic capital mobility within Korea. This finding may confirm the argument that incomplete international capital mobility arises from factors such as foreign exchange risk and institutional differences between countries which are of no consequence for domestic capital flows.