I'm having some difficulty to understand the following sentence:«(...) there's a tight connection between domestic savings and investments at the national level, but very little when we look at the subnational level. Limited spatial correlation is exactly what would be expected if the capital market was doing its job of allocating savings to the most productive investment projects - irrespective of where savings were generated.»

What they're saying is that if there's a high correlation, then there's no financial integration - as at the subnational level?

Any help would be appreciated.


Suppose that you cannot trade capital. I.e., you cannot ship savings from one place to another. In that case, if region A saves 10, region A will invest 10. If region B saves 1, it will invest 1. So, from that example, you can conclude that if markets for capital are closed, the correlation between savings and investment is 1. For completeness, now imagine the free flow of capital situation: region A saves 10, region B saves 1, but it is in region B where all the investment opportunities are, so the regions trade in capital: A invests all its savings in B, and investment in B is then 11, and investment in A is 0. In this second example I and S are therefore negatively correlated ...

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