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Revisiting of Feldstein- Horioka Puzzle: An Empirical Analysis

Year 2021, Volume: 10 Issue: 4, 441 - 448, 31.12.2021

Abstract

The relationship between saving and investment attracts a great majority of macroeconomists. Briefly, Feldstein- Horioka puzzle has been observed as a puzzle, which is related with saving and investment in open macroeconomics. Feldstein- Horioka puzzle argues saving and investment relation under international capital mobility. If internationally capital is highly mobile, this means that relationship between saving and investment is weak. If not so, capital mobility is limited and then saving- investment relation is so powerful. Under perfect capital mobility, it is expected that domestic investment should not finance fully domestic saving. However, Feldstein- Horioka’s (1980) findings show to rebut of this presume. This paper shows extensive literature review for Feldstein- Horioka puzzle especially last two decades. Because literature separates two streams. One group of them try to explain correlation between saving and investment under capital mobility to support Feldstein- Horioka’s finding. Other group of them prove Feldstein- Horioka’s finding inappropriate. This study aims to investigate validity of Feldstein- Horioka hypothesis for 5 big European developed countries: Germany, England, France, Italy and Spain. Findings show that saving retention coefficient is low then it implies capital mobility between countries are high. Finally, Feldstein- Horioka hypothesis is valid but weak form.

References

  • Akkoyunlu, Ş. (2020). Revisiting the Feldstein-Horioka puzzle for Turkey. Journal of Applied Economics, 23(1), 129-148.
  • Apergis, N. and Tsoumas, C. (2009). A survey of the Feldstein-Horioka puzzle: What has been done and where we stand. Research in Economics, 63(2), 64-76.
  • Baltagi, B. (2008). Econometric analysis of panel data (4. Baskı). John Wiley Publication: Great Britain.
  • Caprio, G. A. and Howard, D. H. (1984). Domestic Saving, Current Accounts and International Capital Mobility. International Finance Discussion Paper No.244, Board of Governors of Federal Reserve System.
  • Caporale, G.M. ; Panapoulou, E. and Pittis, N. (2005). The Feldstein-Horioka puzzle revisited: Monte Carlo study, Journal of International Money and Finance, 24(7), 1143-1149.
  • Feldstein, M. and Horioka, C. (1980). Domestic Saving and International Capital Flows. Economic Journal, 90, 314-329.
  • Feldstein, M. (1983). Domestic Saving and International Capital Movements in the Long Run and the Short Run. European Economic Review 21, North Holland, 331-353.
  • Fouquau, J.; Hurlin, C. and Rabaud, I. (2008). The Feldstein-Horioka Puzzle: A panel smooth transition regression approach. Economic Modelling, 25(2), 284-299.
  • Greene, W. (2012). Econometric analysis (Seventh Edition). Pearson Education Publication: USA.
  • Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271.
  • Ho, T. (2002). The Feldstein-Horioka Puzzle revisited. Journal of International Money and Finance, 21(4), 555-564.
  • Ketenci, N. (2012). The Feldstein- Horioka Puzzle and structural breaks: Evidence from EU members. Economics Modelling. 29(2), 262-270.
  • Ketenci, N. (2013). The Feldstein-Horioka Puzzle in Groupings of OECD members: A panel approach. Research in Economics, 67(1), 76-87.
  • Kumar, S. and Rao, B.B. (2011), “A Time Series Approach to Feldstein-Horioka Puzzle with Panel Data from the OECD Countries, The World Economy, 34(3), 473-485.
  • Kumar, S.; Webber, D.J. and Fargher, S. (2012). Testing the validity of the Feldstein-Horioka Puzzle for Australia. Applied Economics, (44), 599-605.
  • Mastroyiannis, A. (2007). Current Account Dynamics and The Feldstein and Horioka Puzzle: The case of Greece. The European Journal of Comparative Economics, 4(1), 91-99.
  • Narayan, P. K. (2005). The Saving and InvestmentNexus for China: Evidence from Cointegration Tests. Applied Economics, 37(17), 1979-1990.
  • Obstfeld, M. and Rogoff, K. (2001). The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?. NBER Macroeconomics Annual 2000, Vol.15.
  • Özmen, E and Parmaksız K. (2003a). Policy regime change and the Feldstein-Horioka puzzle: the UK evidence. Journal of Policy Modelling, 25(2), 137-149.
  • Özmen, E. and Parmaksız K. (2003b). Exchange rate regime and Feldstein- Horioka puzzle: The French evidence. Applied Economics, 35(2), 217-222.
  • Özdemir, Z.A. and Olgun, H. (2008). The Feldstein- Horioka puzzle across countries. Applied Economics, 41(2), 237-247.
  • Papapetrou, E. (2006). The saving‐investment relationship in periods of structural change: The case of Greece. Journal of Economic Studies, 33(2), 121-129.
  • Tang, C.F. and Lean, H.H. (2011). Revisit Feldstein-Horioka puzzle: evidence from Malaysia. Economics Bulletin, 31(3), 2237-2249.
  • Wooldridge, J. M. (2002). Econometric analysis of cross-section and panel data. The MIT Press: USA.

Revisiting of Feldstein- Horioka Puzzle: An Empirical Analysis

Year 2021, Volume: 10 Issue: 4, 441 - 448, 31.12.2021

Abstract

The relationship between saving and investment attracts a great majority of macroeconomists. Briefly, Feldstein- Horioka puzzle has been observed as a puzzle, which is related with saving and investment in open macroeconomics. Feldstein- Horioka puzzle argues saving and investment relation under international capital mobility. If internationally capital is highly mobile, this means that relationship between saving and investment is weak. If not so, capital mobility is limited and then saving- investment relation is so powerful. Under perfect capital mobility, it is expected that domestic investment should not finance fully domestic saving. However, Feldstein- Horioka’s (1980) findings show to rebut of this presume. This paper shows extensive literature review for Feldstein- Horioka puzzle especially last two decades. Because literature separates two streams. One group of them try to explain correlation between saving and investment under capital mobility to support Feldstein- Horioka’s finding. Other group of them prove Feldstein- Horioka’s finding inappropriate. This study aims to investigate validity of Feldstein- Horioka hypothesis for 5 big European developed countries: Germany, England, France, Italy and Spain. Findings show that saving retention coefficient is low then it implies capital mobility between countries are high. Finally, Feldstein- Horioka hypothesis is valid but weak form

References

  • Akkoyunlu, Ş. (2020). Revisiting the Feldstein-Horioka puzzle for Turkey. Journal of Applied Economics, 23(1), 129-148.
  • Apergis, N. and Tsoumas, C. (2009). A survey of the Feldstein-Horioka puzzle: What has been done and where we stand. Research in Economics, 63(2), 64-76.
  • Baltagi, B. (2008). Econometric analysis of panel data (4. Baskı). John Wiley Publication: Great Britain.
  • Caprio, G. A. and Howard, D. H. (1984). Domestic Saving, Current Accounts and International Capital Mobility. International Finance Discussion Paper No.244, Board of Governors of Federal Reserve System.
  • Caporale, G.M. ; Panapoulou, E. and Pittis, N. (2005). The Feldstein-Horioka puzzle revisited: Monte Carlo study, Journal of International Money and Finance, 24(7), 1143-1149.
  • Feldstein, M. and Horioka, C. (1980). Domestic Saving and International Capital Flows. Economic Journal, 90, 314-329.
  • Feldstein, M. (1983). Domestic Saving and International Capital Movements in the Long Run and the Short Run. European Economic Review 21, North Holland, 331-353.
  • Fouquau, J.; Hurlin, C. and Rabaud, I. (2008). The Feldstein-Horioka Puzzle: A panel smooth transition regression approach. Economic Modelling, 25(2), 284-299.
  • Greene, W. (2012). Econometric analysis (Seventh Edition). Pearson Education Publication: USA.
  • Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271.
  • Ho, T. (2002). The Feldstein-Horioka Puzzle revisited. Journal of International Money and Finance, 21(4), 555-564.
  • Ketenci, N. (2012). The Feldstein- Horioka Puzzle and structural breaks: Evidence from EU members. Economics Modelling. 29(2), 262-270.
  • Ketenci, N. (2013). The Feldstein-Horioka Puzzle in Groupings of OECD members: A panel approach. Research in Economics, 67(1), 76-87.
  • Kumar, S. and Rao, B.B. (2011), “A Time Series Approach to Feldstein-Horioka Puzzle with Panel Data from the OECD Countries, The World Economy, 34(3), 473-485.
  • Kumar, S.; Webber, D.J. and Fargher, S. (2012). Testing the validity of the Feldstein-Horioka Puzzle for Australia. Applied Economics, (44), 599-605.
  • Mastroyiannis, A. (2007). Current Account Dynamics and The Feldstein and Horioka Puzzle: The case of Greece. The European Journal of Comparative Economics, 4(1), 91-99.
  • Narayan, P. K. (2005). The Saving and InvestmentNexus for China: Evidence from Cointegration Tests. Applied Economics, 37(17), 1979-1990.
  • Obstfeld, M. and Rogoff, K. (2001). The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?. NBER Macroeconomics Annual 2000, Vol.15.
  • Özmen, E and Parmaksız K. (2003a). Policy regime change and the Feldstein-Horioka puzzle: the UK evidence. Journal of Policy Modelling, 25(2), 137-149.
  • Özmen, E. and Parmaksız K. (2003b). Exchange rate regime and Feldstein- Horioka puzzle: The French evidence. Applied Economics, 35(2), 217-222.
  • Özdemir, Z.A. and Olgun, H. (2008). The Feldstein- Horioka puzzle across countries. Applied Economics, 41(2), 237-247.
  • Papapetrou, E. (2006). The saving‐investment relationship in periods of structural change: The case of Greece. Journal of Economic Studies, 33(2), 121-129.
  • Tang, C.F. and Lean, H.H. (2011). Revisit Feldstein-Horioka puzzle: evidence from Malaysia. Economics Bulletin, 31(3), 2237-2249.
  • Wooldridge, J. M. (2002). Econometric analysis of cross-section and panel data. The MIT Press: USA.
There are 24 citations in total.

Details

Primary Language English
Subjects Economics
Journal Section Article
Authors

M. Can Yardımcı

Publication Date December 31, 2021
Published in Issue Year 2021 Volume: 10 Issue: 4

Cite

APA Yardımcı, M. C. (2021). Revisiting of Feldstein- Horioka Puzzle: An Empirical Analysis. Sakarya İktisat Dergisi, 10(4), 441-448.