Human Capital Formation and Saving-Investment Dynamics

Abstract

This paper explores the dynamics of saving, investment and the trade balance in a two-country version of human capital growth model. As observed in the post-war G7 data, the model economy generates a high saving-investment correlation, together with a countercyclical trade balance. The persistent movement of investment, sustained by the accumulation of human capital, turns out to play a key role in producing the realistic cyclical properties of the model economy.