Savings Wedge, Productivity Growth, and International Capital Flows

The empirical evidence derived from an analysis of a panel sample of 162 economies for the 1980-2013 period demonstrates that a higher productivity growth rate is associated with greater savings. The savings wedge, a type of financial friction, underlies this correlation.T he growth rate has a positive influence on investment.S ince net capital inflows represent a gap between domestic investment and savings, their fluctuation over time is driven by the dynamics of productivity growth.T he evidence also implies that the neoclassical growth model works on the investment side while the allocation puzzle still applies on the savings side of the net capital inflows equation.