Are Saving and Investment Cointegrated: A Fresh Look in Frequency Domain*

The standard intertemporal model of open economy with a dynamic budget constraint predicts that investment and saving should be cointegrated as long as the economy does not violate its budget constraint. Recent empirical studies of the long run investment-saving comovement for the 1947:1–1987:3 period US data, however, report conflicting findings: some studies find that the time series of investment and saving are cointegrated while others are unable to reject the null of no cointegration. One likely reason for these conflicting findings is the low power of the existing time domain cointegration tests. Using the frequency domain framework, I derive the implications of investment-saving cointegration in terms of their cross spectral characteristics. In particular, I show that if the economy’s intertemporal budget constraint is not violated and thus investment and saving are cointegrated with the cointegrating vector [1 –1], then coherence and gain of investment and saving should equal one. Empirical examination of the US time series data for the above sample period confirms this theoretical prediction.