Has the Feldstein-Horioka puzzle waned? Evidence from time series and dynamic panel data analysis

This objective of this paper is to examine the Feldstein-Harioka puzzle by using both time series analysis that accommodates structural breaks, and dynamic panel error-correction method. Our sample consists of 118 countries over the period 1981–2013. Results from ARDL model suggest that long-run capital is highly mobile in high-income countries (HIC), moderately mobile for both middle- and low-income countries. Our finding of the low long-run saving coefficient for HICs shows that failure to account for a structural break may overstate the long-run saving coefficient. Findings from the pooled mean group estimators suggest that capital is moderately mobile in the middle-income countries, and highly immobile in the high- and low-income countries in the long run. Our findings highlight that ignoring structural break, the type of data (time series/panel), and econometric method used can affect the conclusion about capital mobility. The adjustment coefficient in the time series analysis is comparatively higher than the panel data analysis. We also test whether country size and openness affect the saving–investment correlation. While the effect of country size on the saving coefficient is mixed, the saving estimate is found to be a function of the degree of openness. We also discuss policy implications of our findings on the current account sustainability.     

Financial openness and capital mobility: a dynamic panel analysis

Does unrestricted control on the movement of capital increase capital mobility? Theoretically, the answer is yes. This paper uses the Feldstein–Horioka savings–investment methodology to examine the impact of financial openness on the degree of capital mobility in 104 countries. Our estimates suggest that financial openness has increased capital mobility in developing countries, while its effect is statistically insignificant in OECD countries. This also implies that a developing country with more financial openness can have more access to external capital markets for borrowings. Foreign aid also appears to supplement domestic savings for investment in developing countries. In line with the previous findings, our study also confirms that capital is more mobile for developing countries.     

Determinants of household savings in China and their role in quasi‐money supply1

This study derives household saving potential empirically from econometric models of Chinese urban and rural household consumption and uses this potential to explain household bank deposits. Model simulations are performed to analyse the effects of interest rates, income and income uncertainty on the saving potential and the bank deposits. The bank deposits variable is then used to explain quasi‐money supply. High bank absorption of household savings is found to account mainly for the rapid growth in quasi‐money, which in turn explains the exceptionally high M2/GDP ratio. Households’ savings are largely predictable from their regular consumption.     

Saving,investment and capital mobility in EU member countries: a panel data analysis of the Feldstein–Horioka puzzle

ABSTRACT

In this paper, we reexamine the long-standing and puzzling correlation between national saving and investment in 14 European Union (EU) countries. We employ a panel data set for the period 1970–2015 and we apply recently developed maximum likelihood panel cointegration methodologies. We find that there exists a long-run relationship between savings and investment for this panel of EU member countries, with the savings retention coefficient being low in magnitude but statistically different than zero. Therefore, we argue that there is weak evidence in favour of the Feldstein–Horioka puzzle and that the long-run international solvency condition is maintained in most of these countries. This evidence implies a moderate degree of capital mobility which is consistent with the macroeconomic experience of these countries during the period under investigation.     

Terrorism,openness and the Feldstein–Horioka paradox

This paper investigates how terror threats and international openness affect the savings retention coefficient in the Feldstein–Horioka equation. We find that terrorism marginally increases the size of this coefficient, which may result from an increase in the precautionary saving motives. However, even a small increase in openness offsets this effect and significantly lowers the propensity to retain domestic savings for investment. This suggests that, given more channels, capital leaves domestic boundaries to land in safe places abroad. At least partly, the results explain the paradoxical finding in the literature that capital is more mobile in developing countries, even though they are less open. We also find that all types of terrorism reduce investment.     

Investment opportunities in the source country and temporary migration

Abstract This paper examines how attractive investment opportunities available to temporary migrants at home affect their saving behaviour and the optimal duration of stay abroad. The model predicts an inverse U‐shaped relationship between migration duration and the expected rate of return on repatriated savings. A higher rate provides an incentive to go back earlier and consume less abroad, while it can also trigger emigration aimed at generating the savings required for investment after return. The paper illustrates how the behaviour of temporary migrants reflects the interaction between their preferences and the opportunities available in labour and capital markets of both countries.     

The Feldstein–Horioka model re-visited for African countries

We study the relationship between the saving and investment rates for 20 African countries using a long period of data. A high correlation between saving and investment is often taken as evidence of capital immobility. We use the new Ng–Perron unit root tests to examine the stationarity of saving and investment rates. Both Johansen cointegration tests and fractional cointegration tests are used. The results are mixed. The Johansen cointegration tests show that the saving and investment rates are cointegrated only for Rwanda and South Africa. This implies that for the other 18 countries, there is evidence of capital mobility. The fractional cointegration test results are different. The two rates are found to be fractionally cointegrated for the following 12 countries: Algeria, Burundi, Egypt, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Tunisia, Tanzania and Zimbabwe. For Cote d’Ivoire, Kenya, Lesotho and Sierra Leone there is some evidence of capital mobility while the results for Ethiopia, Malawi, Mauritius and Nigeria are mixed.     

The Link between Domestic Investment and Domestic Savings in Open Economies: Evidence from Balanced Stochastic Growth

What relationship between domestic and foreign variables could explain the observed high correlation between domestic savings and investment in OECD countries with perfect capital mobility? Is such an explanation empirically supportable? This paper constructs a stochastic continuous-time optimizing model of a small open country. It finds the formula for the implied theoretical correlation between domestic savings and investment—of interest in its own right—and calibrates the model using regression coefficients and stock market data from the US and Canada. The model accounts quite well for the observed investment-savings correlation, even in the presence of perfect capital mobility.     

Testing the Saving-Investment correlations in India: An evidence from single-equation and system estimators

This study tests the Saving-Investment correlations in India using both single-equation and system estimators. All the estimators suggest the cointegrating relationship between saving and investment, and the results are robust to the choice of estimator. The conventional and new CUSUM tests show long-run stability of equilibrium residuals and reinforce the cointegrating relationship between the model series. The slope parameter on saving is significantly different from zero, but not from one. These results support the FH hypothesis and suggest the imperfect mobility of capital and home-bias in the asset portfolio of domestic investors. The heavy reliance of investment on domestic saving also reinforces the ‘Lucas Puzzle’ on the lack of capital flows from the developed countries to the developing countries with scare capital and higher marginal product of capital.     

The Feldstein–Horioka puzzle revisited: Is the home-bias much less?

The large correlation between domestic savings and investment is well documented and is known as the Feldstein–Horioka puzzle. We demonstrate that estimates of the FH coefficients using the standard framework are biased upward in the presence of highly positively correlated inward and outward capital flows. Using data for the 14 OECD countries, the analysis shows that the significant home bias documented by FH and others is also consistent with much higher levels of capital mobility when capital outflows and inflows are highly positively correlated. Taking account for these correlations reduces the estimated home bias somewhere between 45% and 90%.     

Saving, Investment, and Capital Mobility in LDCs

The Coakley, Kulasi, and Smith current-account solvency model ( Economic Journal , 1996, pp. 620–7) is used to investigate saving and investment in LDCs. This model implies that saving and investment cointegrate with a unit coefficient irrespective of the degree of capital mobility. Panel and conventional unit-root tests indicate that LDC current accounts are stationary. The Feldstein–Horioka cross-section regression coefficient for LDCs is lower than the corresponding OECD coefficient, indicating different policy responses in these countries rather than higher capital mobility. Finally, adjustment toward solvency is slower in LDCs, reflecting their vulnerability to external shocks and the impact of financial repression.     

The Feldstein–Horioka puzzle in groupings of OECD members: A panel approach

This paper investigates the relationship between investment and savings in 26 OECD countries and demonstrates that the relationship changes when the countries under consideration in the selected panel vary. Accordingly, panel estimations using annual data for the period from 1970 to 2008 have been made for various groupings of developed countries, specifically the OECD as a whole, the EU15, NAFTA and the G7. Additionally, the paper examines changes in investment savings relationships when the presence of structural shifts in developed countries – where such exist – are taken into account. Recently developed panel techniques are employed to examine the investment savings relationship and estimate saving-retention coefficients. The empirical findings reveal that the Feldstein–Horioka puzzle exists only in the panel of G7 countries, wherein the saving-retention coefficient is estimated as 0.754 and 0.864 (for the full sample of G7 countries and for stable G7 countries, respectively). The estimated saving-retention coefficient for unstable G7 countries is 0.482, which indicates a higher level of capital mobility in unstable countries with respect to stable ones. This conclusion is further supported by the estimations for OECD countries and the EU15.     

Capital Stock and Economic Development in Hungary

This paper introduces a method of calculating physical capital stock figures in transition countries and derives data for Hungary. On the basis of international experience, we set investment and saving paths for future income levels. Confrontation of savings prospects of different sectors with investments needs leads to an economic policy analysis of the fiscal policy needed to catch up to 70 per cent of Austrian per capita income by 2030.     

Country characteristics and the incidence of capital income taxation on wages: An empirical assessment

This paper examines the incidence of corporate income taxes on wages using data from the US Bureau of Labor Statistics for 13 OECD countries. Within a wage‐bargaining framework, our econometric analysis shows that a substantial share of the corporate tax burden is shifted from capital to labour. However, the magnitude of this shift is influenced importantly by country characteristics affecting the process of wage determination, such as the degree of capital mobility, a country's relative influence over the world price of output and trade unions’ strength.     

International corporate taxation and U.S. multinationals' behaviour: an integrated approach

Abstract .  This paper explores the effects of corporate taxation on U.S. capital invested abroad and on tax planning practices. The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact particularly for low-tax rates, implying that the attractiveness of low-tax countries is not weakened by anti-deferral rules and cross-crediting limitations. Further explorations suggest that firms report higher profit, higher Subpart F income, and are less likely to repatriate dividends when they are located in low-tax jurisdictions. Finally, when the role of effective transfer pricing regulations is estimated, it appears that low degrees of law enforcement are associated with higher income shifting.     

Current account dynamics and capital mobility in the newly industrialized countries

This paper examines the current account dynamics in a group of ten newly industrialized countries (NICs) during the period 1980–2012 using a panel error-correction model. The model is also used to empirically test whether the degree of capital mobility is positively related to financial openness. The Chin-Ito (2006, 2008) financial openness index is used to classify the countries into different groups, and we place the countries in one group that are similar to each other in terms of their financial openness. Furthermore, to evaluate the extent of capital mobility over the different period from 1980 to 2012, the total period under study is divided into three sub-periods. The estimation results indicate that there exist long-run equilibrium relationships between domestic saving, investment, and current account in all groups regardless of their degree of financial openness. We find that more openness in terms of the capital account is associated with a higher degree of capital mobility in the case of NICs. The empirical result also indicates that the degree of capital mobility is higher in the first and third sub-period.     

Saving–investment Association and Regional Capital Mobility in China: A Nonparametric Panel Approach

Using a nonparametric panel data model, this paper estimates the degree of time‐varying and province‐specific capital mobility in China during 1970–2006. We estimate the savings–investment association, that is, the savings retention rate à la Feldstein and Horioka, as a measure of capital mobility. We also split the total savings (investment) into private and government savings (investment) to explore the role of government in improving capital mobility. Over time, we find an improvement in capital mobility after the mid‐1990s. Across provinces, we observe higher capital mobility in eastern/coastal regions. From the 1990s, the government is found to play a less important role in promoting capital mobility. Across provinces, the government is found to be more important in either the municipalities (Shanghai and Beijing) or the less developed inland provinces.     

Capital mobility,openness, and saving-investment relationship in Asia

The main objective of this paper is to investigate the relationship between openness to trade and saving-investment behaviour in Asia during the period 1990–2006. We use this relationship to examine whether those Asian countries that are more open to trade and enjoy less trade barriers have also higher degree of capital mobility. Cluster analysis is used to classify the countries into different groups according to the share of trade in their gross domestic products and their average tariff rates. The goal is to place the countries that are similar to each other in terms of their trade policy in one group. We apply the Generalized Least Square (GLS) technique to a set of balanced panel error correction models to estimate the short- and long-run relationship between saving and investment. The estimation results indicate that there exist long-run equilibrium relationships between domestic saving and investment in all groups regardless of their degree of trade openness. Moreover, contrary to Amirkhalkhali and Dar (2007) for the case of OECD, we find out that more openness in terms of trade policy is associated with higher degree of capital mobility for the case of Asian countries. One policy implication of this result for the Asian economies is that trade openness can be used as a strategy to attract capital from abroad. Our findings also confirm the prediction of new open economy macroeconomic models regarding the short- and long-run behaviour of current account.     

Aid and the growth of income in aid-favoured developing countries: policy issues

This paper opens by expressing disappointment in the disparities between published estimations of the effectiveness of foreign aid to developing countries and effectiveness data which arise from the application of complex econometric methods. The new dilemmas for aid policy include the fact that aid increasingly devoted to human development at the expense of productive activity is unlikely to create the material development which will allow maintenance of human development targets. The second part of the paper presents comparative statistics on gross national product, official development assistance, and savings growth which paint a disturbing picture because the growth of domestic savings has been negative in the period 1967-87 in nine of the 11 less developed countries with data available. Section 3 covers the shortcomings of econometric experiments which neither confirm nor deny the findings of other studies on the effectiveness of aid. The fourth section describes constraints to the growth of income imposed by the foreign exchange, the rate of return on investment, and the growth of labor productivity and presents statistical evidence supporting aid policy which would 1) take advantage of opportunities to rehabilitate output growth in traditional industries without the addition of a great deal of capital, 2) direct attention to increasing the absolute gross national product (GNP) to raise the growth of per capital income, and 3) strategically reorient the structure of aid to increase the absolute GNP faster to accelerate reversal of the negative savings pattern and speed the reduction of fertility. Section 5 considers suggested shifts in aid policy orientation dealing with 1) population growth, income level, and food security; 2) reconstruction and structural adjustment; 3) rationalizing aid for social, institutional, and human development and technical assistance. The concluding section notes that the suggested strategic reorientation of the structure of aid should result in reduced population growth.     

International Capital Mobility and Saving-Investment Relationship in the Newly Industrialized Countries

This paper investigates the Feldstein-Horioka coefficients and evaluates the degree of international capital mobility for ten newly industrialized countries (NICs) over the different sub-periods from 1970 to 2010. By applying the Pedroni and Westerlund cointegration tests, we find that saving and investment are indeed cointegrated. The estimated FH coefficients using FMOLS and DOLS are 0.24 and 0.33, respectively, for the period 1970–1980. Furthermore, the estimated FH coefficients reduce from 0.80 (FMOLS) in 1991–2000 to 0.36 (FMOLS) in 1970–1980. The small FH coefficients suggest that international capital mobility increased in the NICs during the sub-periods 1970–1980 and 2001–2010.