International Capital Mobility of Bangladesh, India, Pakistan, and Sri Lanka

The degree of capital mobility and the long-run relationship between domestic saving and investment have various policy implications for a county. Feldstein and Horioka (1980) argue that in a world of perfect capital mobility, domestic saving and domestic investment would not be correlated to each other. Economists have studied extensively the relationship between saving and investment for developed countries but the same is not true for developing countries. We study the relationship between saving and investment rates for the four countries, namely, Bangladesh, India, Pakistan and Sri Lanka. We use advanced econometric methods for the study. We use both Jansen (1996) and Johansen cointegration tests to study international capital mobility. We study pair wise Granger causality tests in the VAR setting and use the bivariate Granger causality test. The results show that there is no long run relationship between saving rate and investment rate for the South Asian countries. Hence, we conclude that there is international capital mobility for these countries.