18 its supplementing domestic savings, is another question. National accounts imply that by definition:

# (4) (I/GDP) = (SIGDP) - (CA/GDP)

where CA = the current account.

The negative of the current account is the net capital flow, including reserve movements. Even if net capital flow Is small and not related to investment, there can be significant gass capital flows, or significant net capital flows offset by reserve movements that reflect government intervention in the foreign exchange market. As noted in the introduction to this section, gross c apital flows are the most rapidly growing element in the balance of paym' , The conflict between the Feldstein- norioka result and the casual observation of apparently high, if not pewfect, degree of capital mobility is nonetheless so great that a number of authors have sought to explain the result and demonstrate strong capital mobility. One approach is to focus on some important econometric and data questions. Using equation (3) as a regression equation is equivalent to assuming that the current account is normally distributed and independent of the domestic saving rate. Given the small number of observations in the Feldstein-Horioka results, it is difficult to say much about the distribution of the residual (the current account). However, it is well known that the domestic savings rate, S/GDP, usually is estimated as a residual in the national accounts, with the investment rate and the current account estimated independently. Thus it is quite possible that the assumed error term and the savings rate are not indepensdent, creating a bias in the regression results.

## Sachs (1981, 1983) estimated equations of the form:

# _(5)_ (CA/GDP), = a + b((I/GDP)1 + u;

which avoids this criticism-there are errors of measurement but they are independent of the error term (which is S/GDP, by the national accounts identity). Sachs' results generally show that the investment ratios have a statistically significant relationship with current account deficits in the OECD. This would seem to contradict the Feldstein-Horioka results. However, Penati and Dooley's results suggest that Sachs' results are sensitive to the choice of sample period and countries.

Another explanation of the Feldstein-Horioka results focusses on the possibility that the high correlation of the average rates of domestic saving and investment across the sample countries does not imply immobility of capital internationally. In some sense this argument is a version of Lucas' critique: if all countries have similar investment productivity and savings functions with similar arguments and 'exogenous" variables, then it is not surprising that, on average, there is a close relation between domestic saving and investment (Harberger, 1979). Simply put, what can one say about international capital mobility from a sample of countries that on average have zero current account deficits?

Cumby demonstrates the point rigorously: using a standard result of the life cycle model that savings and investment rates are correlated with population growth (and rates of labor augmenting technical progress) and the share of capital, he shows that OECD country data would generate a high correlation between average rates of saving and of investment, even if capital were completely mobile. Summers and Dooley, Frenkel and Mathieson develop this critique empirically; they show that developing countries have a much lower coefficient than the OECD countries and when they are included in the pooled sample, the coefficient of savings drops sharply, although the difference is not significant