Capital Mobility in Germany

The study examines the causal relationship between domestic investment and domestic saving for Germany over the period of 1971 to 2016 using advance time-series estimation methods following the seminal work by Feldstein and Horioka (FHP) in 1980. The study also investigates the sensitivity of domestic investment to different types of saving ratios (gross enterprise savings, gross household savings, and gross government savings). The findings of the saving-retention (β) coefficient indicate high capital mobility in Germany. The effect of Maastricht treaty of 1992 has significantly affected saving and investment relationship. The result also indicate that the integration of European Union has increased dispersion between savings and investment ratios, and has negatively affected the overall domestic investment. The findings are contradictory with FHP, signifying that most of the domestic saving tends to be invested abroad in case of Germany. Furthermore, the results for the sensitivity of domestic investment to different forms of saving ratios suggest that the government savings is mostly invested domestically. Whereas, private savers in Germany are inclines to invest abroad. This trend has increased considerably since the formation of European Union. Thus, it implies that domestic investment is less associated with different types of savings (other than government savings). Overall, one can conclude that capital mobility in Germany has increased especially after Maastricht treaty in 1992. One can argue that Germany could effectively implement policies that emphasis on increasing domestic investment through domestic savings.