he found that between 30 and 60 percent of the change in domestic investment was reflected in compensatory changes in the current- account balance.
Second, von Furstenberg constructed a small model for the United States of the basic income flows involved in the saving-investment relationship.50 He concluded that domestic factors relating to saving and investment explain as much as 80 percent of the variation in the net foreign investment balance. His study implies that a major effect of a policy-induced increase in the national saving rate would be to shift the foreign account toward a surplus.
The Sachs and von Furstenberg studies suggest that the international aspects cannot be ignored in the discussion of alternative measures to expand capital formation. While many investigators would agree with the Feldstein-Horioka view that there are significant barriers to the free movement of capital among countries in the short run, it is in the short run that the Keynesian income effects are most important. In the long run the income effects may be of less concern, but it is more difficult to argue that capital will not flow to the country where the returns are greatest.51 It seems unreasonable to combine for analytical purposes a long-run model of flexible prices and full employment with a short-run assumption that capital will not move among nations to equalize rates of return. It is more reasonable to take the view that incentives to expand saving must be matched by concurrent actions on the investment side if there is to be an effective increase in domestic capital formation.
Economists have achieved a greater consensus about the effect of interest rates and tax policy on investment than about their effect on private saving. In part, this is because there is less uncertainty from a____________________