Saving, Investment, and the Regional Current Account: An Analysis of Canadian, British, and German Regions


WP/93/62-EA

Saving, Investment, and the Regional
Current Account: An Analysis of Canadian,
British, and German Regions by Alun H. Thomas

This paper examines the relationship between saving and investment on a
regional level to measure the extent of capital mobility across regions. It
finds that the relationship between total regional saving and investment is
significantly negative in Canada and the United Kingdom; this finding
contrasts with the significant positive relationship obtained from a similar
analysis across countries.

The difference, attributed to subsidies given by national governments
to poor regions, is demonstrated by a strong negative relationship between
government saving and investment across regions in contrast to the positive
relationship between private saving and investment for the United Kingdom
and an insignificant relationship elsewhere. When private saving is broken
up into personal saving and corporate saving, a positive relationship is
found between corporate saving and private investment, indicative of
corporate liquidity effects. Personal saving, on the other hand, is
unrelated to investment, thereby indicating capital mobility.

A test for the presence of regional liquidity constraints is developed
by ascertaining whether movements in investment are more closely associated
with movements in retained earnings in peripheral regions than in central
regions. The results suggest no difference in liquidity constraints between
central and peripheral regions.