Over the last 30 years, various factors have pushed up the global saving supply and depressed interest rates (). But the investment response has been lukewarm at best. So why did we see a global saving glut, but not a global investment boom? Here's my take.
First, higher saving supply means weaker demand. In turn, weak demand lowers firms' incentives to invest. Due to this effect, an increase in saving supply may lead to a fall in investment and growth! This is what we show in Stagnation Traps (academic.oup.com/restud/article…).
Second, foreign capital inflows tend to boost demand for non-tradables, and reduce economic activity in tradable sectors. If investment is concentrated in T sectors, such as manufacturing, higher foreign savings can depress domestic investment and growth. Moreover, since capital
flows have been directed toward the US - i.e. the world technological leader - the global saving glut might have reduced global investment and growth. You can think of this effect as a global financial resource curse (crei.cat/wp-content/upl…).
Consistent with this argument, the empirical evidence seem to suggest that capital inflows mainly end up financing consumption of NT goods (see crei.cat/wp-content/upl… and this very nice paper by @profsufi, @AtifRMian and @EmilVerner papers.ssrn.com/sol3/papers.cf…).
A third explanation is that the global saving glut has reduced investment by lowering competition among firms. This interesting argument has been put forward by @ErnestLiuEcon, @AtifRMian and @profsufi (scholar.princeton.edu/sites/default/…). See also the excellent book by @ThomasPHI2
(hup.harvard.edu/catalog.php?is…). Bottomline: the global saving glut might have very well caused a global investment bust, and contributed to the recent productivity growth slowdown affecting most advanced economies!
