Revisiting of Feldstein- Horioka Puzzle: An Empirical Analysis

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

M. Can Yardımcı

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.

Keywords

Feldstein- Horioka Puzzle, Capital Mobility, Panel Data.

Revisiting of Feldstein- Horioka Puzzle: An Empirical Analysis

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

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