Feldstein–Horioka puzzles

The high correlation between national saving and investment rates in advanced economies—the Feldstein–Horioka puzzle—has been referred to as the “mother of all puzzles.” Perhaps more puzzling is that for emerging economies saving–investment correlations tend to be significantly lower, though still positive. This deepens the Feldstein–Horioka puzzle because the mobility of capital is generally believed to be much lower in emerging economies than in advanced economies, and a country with less mobile capital should have a tighter relationship between local saving and investment rates. This paper develops a DSGE model that, without resorting to any real or financial friction, simultaneously explains these two aspects of the Feldstein–Horioka puzzle: positive saving–investment correlations in both advanced and emerging economies and significantly lower saving–investment correlations in emerging economies than in advanced economies. The main features of the model include long-run risk, an endogenous world interest rate, and cross-correlations of national and global shocks. The findings hold for both quarterly time series and long-run averages.     

The ‘real’ explanation of the Feldstein–Horioka puzzle

This article shows that global capital markets cannot, by themselves, achieve net transfers of financial capital between countries and that both the integration of global financial markets and the integration of global goods markets are needed to achieve net transfers of capital between countries. Frictions (barriers to mobility) in one or both of these markets can impede net transfers of capital between countries, produce the Feldstein and Horioka (1980) results and prevent real interest rates from being equalized across countries. Moreover, there is empirical evidence that barriers to the mobility of goods and services are an important obstacle to international capital mobility.     

Investment and saving in Angola and the Feldstein–Horioka puzzle

This article analyses the relationship between investment and savings for Angola using the Feldstein–Horioka puzzle, with monthly data from January 2000 to December 2013. Integer and fractional integration and cointegration techniques are employed to investigate the relationship between investment and savings. Several regression specifications are employed, concluding that the Feldstein–Horioka puzzle is not validated for the Angolan economy. Policy implications are derived.     

Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI

In this paper, we analyze the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions.Employing dynamic panel data approaches to these five countries over the period 1997q1–2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share and housing price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results.The findings of this paper indicate that all policy measures that can be implemented to promote growth, employment, productivity and competitiveness and to reduce external and public debt in these countries are fundamental to stabilize their economies.     

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.     

The fundamentals of sovereign debt sustainability: evidence from 15 OECD countries

We study the sustainability of sovereign debt accumulation in 15 OECD countries using quarterly data from 1980 to 2010 with a focus on how and in what countries debt sustainability changed after the commencement of the Euro Convergence Criteria in 1997 as well as after the financial meltdown in 2007. We define sustainability as the validity of the inter-temporal budget constraint of the government and test a sufficient condition motivated by Bohn (Q J Econ, 113(3):949–963, 1998) using single-country and pooled regressions. We find evidence that the Euro Convergence Criteria contributed to the sustainability of debt accumulation. Further, while the yield spreads suggest the debt crisis is a problem of the southern Euro countries, we find a lack of debt sustainability for Greece, Portugal and France but not for Italy and Spain. In terms of debt sustainability, the crisis adversely affected primarily stand-alone countries rather than members of the European Monetary Union. Nevertheless, yield spreads increased more in the southern countries of the monetary union than in stand-alone countries. Our results support the view that countries within a monetary union are more prone to investors’ sentiments than stand-alone countries.     

The polarization impact of the crisis on the Eurozone labour markets: a hierarchical cluster analysis

This study assesses the impact of the Great Recession (2008–2014) on the process of integration of the Eurozone labour markets. Through an agglomerative hierarchical cluster analysis using several European labour market harmonized indicators, we find that the crisis led to a greater integration, and to a polarization within the area. In the aftermath of crisis, two groups of countries clearly emerged, consisting Austria, Belgium, Finland, France, Germany, Italy, Luxembourg and Netherlands in the core while Greece, Ireland, Portugal and Spain in the periphery.     

Impact of FDI in the Fiscal Adjustment Process

Economic history, particularly the history of the Eurozone, is full of cases of countries experiencing severe economic crises. These crises may have different causes and effects and may be transmitted differently among the affected countries. However, the type of crisis that has the most widely spread political, economic, and social impact is the recession crisis. As a rule of thumb, a recession crisis is the result of a separate crisis, such as a country’s debt crisis (e.g. Greece, Portugal and Spain), a financial and banking crisis, or a crisis due to various bubbles (e.g. the real estate crisis in the United States). The main purpose of this paper is to study the course of a series of countries, which were or currently are in a crisis and a supervised adjustment program, in terms of managing the exit from the crisis, the implementation of macroeconomic and reform policies, the policy applied for attracting foreign direct investments, and the impact of such policy on the countries that were affected by the crisis.     

Beyond Balassa and Samuelson: real convergence,capital flows,and competitiveness in Greece

To better understand the convergence process prior and since the European financial and debt crisis, we scrutinize the role of capital flows for competitiveness in Greece and a set of six other euro area member countries (Portugal, Latvia, Estonia, Lithuania, Slovenia and the Slovak Republic). For this purpose the paper extends the seminal Balassa–Samuelson model by international capital markets with a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to make real wages increase beyond productivity increases. The augmented Balassa–Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 reveal correlations in line with the Balassa–Samuelson effect, if Greece is excluded from the panel. For Greece, this in turn implies indication in favour of a credit-driven real wage increases beyond productivity increases what we call a “pseudo” Balassa–Samuelson effect.     

The ‘real’ explanation of the PPP puzzle

This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalization across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalization across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high-saving-investment correlations and prevent real interest rates from being equalized across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from purchasing power parity (PPP) for extended periods of time and can therefore also explain the PPP puzzle. Consequently, we are able to resolve two of Obstfeld and Rogoff’s (2000) ‘6 major puzzles in macroeconomics’ with essentially the same explanation.     

HAS INTERNATIONAL CAPITAL MOBILITY INCREASED IN ASIA? EVIDENCE FROM THE POST‐1997 FINANCIAL CRISIS PERIOD

This paper examines whether international capital mobility in Asia has increased after the 1997 Asian financial crisis by estimating the Feldstein‐Horioka (FH) coefficients using panel cointegration and dynamic OLS regressions. In the benchmark estimation, we find that the FH coefficients of ten Asian economies decrease significantly from 0.65 during the pre‐crisis period to 0.32 during the post‐crisis period. Furthermore, the coefficient for the post‐crisis period is less statistically significant than that for the pre‐crisis period. The extended model estimations with additional control variables controlling for the business cycle, different foreign exchange rate systems, and capital control also show the results which are consistent with the benchmark estimation results. Rolling regressions show a consistently declining trend of the FH coefficients in Asia during our sample period. These results provide consistent evidence, according to the FH proposition, of increasing international capital mobility in Asia during the post‐1997 Asian financial crisis period. (JEL F36, F37, F21)     

Euro Crises and Euro Scams: Trade not Debt and Deficits Tell the Tale

The euro crisis has been typically presented as excessive fiscal deficits leading to the accumulation of unsustainable public debts. This debt and deficit diagnosis applied most notably in Greece and Italy, but also in Portugal and Spain (the ‘PIGS’). Implicit in much of the analysis, and occasionally explicit, is the suggestion that these were not only profligate but also lazy PIGS that spent beyond their means and abandoned a commitment to international competitiveness. This article demonstrates that the German export-led growth strategy generated large trade and current account deficits throughout the eurozone in the 2000s. When the global financial crisis struck the continent in 2008, these trade-based deficits proved unsustainable. With the exception of Greece, neither public debts nor fiscal deficits represented a major problem among eurozone countries prior to 2008. The analysis leads to measures that could have avoided the crisis of sovereign debt entirely, as well as corrected the unsustainable trade balances in the euro zone. These policies were not seriously considered, with the result that in the second decade of the 21st century the future of the common currency is in doubt.     

Eurozone crisis and BRIICKS stock markets: Contagion or market interdependence?

This paper examines the financial contagion in an emerging market setting by investigating the contagion effects of GIPSI (Greece, Ireland, Portugal, Spain and Italy), USA, UK and Japan markets on BRIICKS (Brazil, Russia, India, Indonesia, China, South Korea and South Africa) stock markets. During Euro-zone crisis period (October 19, 2009–January 31, 2012), the empirical results indicate that among GIPSI countries, Ireland, Italy and Spain appear to be most contagious for BRIICKS markets compared to Greece. The study reports that Brazil, India, Russia, China and South Africa are strongly hit by the contagion shock during the Eurozone crisis period. However, Indonesia and South Korea report only interdependence and not contagion. From policy perspective, the findings provide useful implications for possible decoupling strategies to insulate the economy from contagious effects. For multilateral organizations like International Monetary Fund (IMF) and World Bank, the study will provide an important direction in undertaking coordinated rescue measures for the vulnerable as well as contagious countries.     

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.     

Current account balance cyclicality

We assess the cyclicality of current account balances for the period 2001Q1–2014Q4, focusing on Portugal and using Germany as a benchmark. We find that the cyclical component of the current account was positively explained by 3-month Euribor, but negatively by the financial crisis, systemic stress in Europe, employment and compensation of employees. Moreover, the noncyclical current account was positively affected by the period of the economic and financial adjustment programme and the terms of trade, but negatively influenced by financial integration.     

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%.     

The Feldstein–Horioka puzzle across EU members: Evidence from the ARDL bounds approach and panel data

This paper addresses the saving-investment (SI) correlation for the EU15 member countries, using the ARDL approach and panel regressions. If we accept the Feldstein–Horioka [Feldstein, M. and C. Horioka, 1980, Domestic saving and international capital flows, Economic Journal 90, 314–329.] interpretation of the SI correlation, the evidence from the ARDL approach does not point to any particular direction in terms of country size, or level of development, or economic and capital market structure. Panel regressions yield an SI coefficient in the range of 0.148–0.157. This finding is attributed to higher capital mobility, lower transaction costs in the international capital markets, and the declining status of long-run current account targeting as a primary government objective.     

The Political Economy of Austerity in Southern Europe

ABSTRACT

Europe’s response to the sovereign debt crisis in Southern Europe has been premised on the idea that these states can return to growth through internal devaluation and fiscal consolidation. This article explores the distributive consequences of that strategy in Greece, Portugal, Italy, and Spain. We argue that standard measures of poverty do not capture the deterioration in living standards as fully as anchored poverty. Moreover, we show that inequality trends conceal considerable re-ranking within the income distribution: those who were rich in 2012 had got richer in 2009–12, but those who were rich in 2009 lost ground in 2009–12. We find that in all four countries the new poor include significantly fewer pensioners and more unemployed workers, and are considerably poorer than the old poor had been. We demonstrate that there was significant variation in the magnitude and design of austerity, with Italy imposing a far smaller adjustment than Spain, and Portugal achieving less inequality in spite of robust fiscal consolidation. Nevertheless, even when austerity measures were designed to reduce inequality by compressing incomes downward, their second-order macro-economic effects ultimately increased inequality (except in Portugal). In the last section, we explore the political reasons for this variation.     

Modelling the world economy at the 2050 horizon

Economic analysis is increasingly addressing long‐term issues (such as global warming) that require a dynamic baseline for the world economy. In this article, we develop a three‐factor (capital, energy, labour) macroeconometric (MaGE – Macroeconometrics of the Global Economy) model, and project growth for 147 countries to 2050. We improve on the literature by the following: (i) accounting for the energy constraint through dynamic modelling of energy productivity, (ii) modelling female participation rates consistent with education catch‐up, (iii) departing from the assumptions of either a closed economy or full capital mobility (by applying a Feldstein–Horioka type relationship between saving and investment rates), and (iv) offering a fully consistent treatment of the Balassa–Samuelson effect. These innovative features have a sizeable impact on projected GDP.     

Financial Liberalization and Inflationary Dynamics: An Open Economy Analysis

Abstract

This paper analyzes the effects of financial liberalization on inflation. We develop an open economy monetary endogenous growth general equilibrium model, with financial intermediaries subjected to obligatory ‘high’ reserve ratio, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, which typically had high reserve requirements, the model indicates a positive inflation–financial repression relationship irrespective of the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates.