The Feldstein–Horioka Puzzle and structural breaks: Evidence from EU members

The purpose of this paper is to investigate the level of capital mobility in European Union members using the Feldstein–Horioka puzzle proposed by Feldstein and Horioka (1980) in order to investigate relations between saving and investment flows. In this paper, data for 23 European countries were used over the period of 1995–2009 on the quarterly basis. Two different tests were used to estimate the stationarity of the model variables, which are the Ng and Perron (2001) unit root test procedure and approach proposed by Zivot and Andrews (1992) for unit root test allowing for a structural shift. Then the Kejriwal and Perron (2008, 2010) structural break test was applied to determine the presence of structural breaks in series. In most countries except Belgium and Finland UDmax and WDmax tests rejected the hypothesis of no breaks. To test the cointegration relationships between investment and saving flows of European Union members three different cointegration techniques were applied to the data. Firstly, the Johansen (1988) cointegration approach was used for the case of no cointegration shifts, then the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift. Finally, again the Johansen' cointegration approach was used; however, this time with the inclusion of dummy variables related to earlier selected structural break locations. The empirical results provided stronger evidence of cointegration between investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks was ignored. The estimated saving retention coefficient in the presence of structural breaks using the Kejriwal and Perron (2008, 2010) approach appeared relatively low in many cases, illustrating by this the openness of estimated countries. In general, world and European countries with time have a tendency to a higher level of their capital market openness. Estimations of a saving retention coefficient in the presence of structural changes do not support the existence of the Feldstein–Horioka Puzzle in the considered EU countries, except Belgium.     

Intertemporal sustainability of current account imbalances: New evidence from the OECD countries

This study estimates the intertemporal model for the relationship between exports and imports and examines the sustainability of current account deficits (CADs) and the validity of intertemporal budget constraint for 24 Organisation for Economic Co‐operation and Development countries. The standard ordinary least squares (OLS)‐based two‐step Engle and Granger test, the cointegration regression Durbin–Watson (CRDW) test, and the Stock–Watson test performed on the one‐regime model with time‐invariant parameters and no structural break provide mixed support for the presence of cointegration between exports and imports. The recursive least squares‐based cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) tests and the OLS‐based Andrews‐Quandt (AQ) and Andrews – Ploberger (AP) tests suggest the presence of structural breaks in the long‐run relationship between exports and imports for a number of countries. The end‐of‐sample new cointegration breakdown tests performed on the OLS, fully modified OLS, and full‐information maximum‐likelihood estimates of the model suggest the presence of cointegration between exports and imports for most countries. The dominant support for cointegration between trade flows points toward the sustainability of CADs and the validity of intertemporal budget constraint. The macroeconomic stabilization policies seem to have been effective in correcting the market failures and maintaining the steady‐state equilibrium relationship between trade flows in the sample countries. The findings of this study have important implications for empirical research. The structural breaks in the cointegrating vector could occur even over the short time periods and at any point in time. It is essentially important to assess the sustainability of the external position in the presence of long‐period as well as short‐period breaks in the cointegrating vector.     

Sustainability of current account deficits in India: an intertemporal perspective

This study examines the sustainability of current account deficits (CADs) and the validity of intertemporal budget constraint (IBC) in India. The long-run model is estimated on annual data for the period 1950–1951 to 2009–2010. The optimal single-equation and maximum-likelihood (ML) system estimates of the model provide a consistent support for the long-run relationship between imports and exports. The OLSGH estimates provide no support and that ML system estimates a consistent support for cointegration in both the models estimated with one and two structural breaks in level. The new cointegration breakdown tests generally suggest that the cointegration prevails from 1951 to 2010. The evidence supporting the cointegration between imports and exports overwhelms the evidence providing a mixed or no support for cointegration. The estimates of slope parameter above zero and the dominant support for cointegration between imports and exports vindicate the validity of IBC and the sustainability of CADs. The short-term management strategies need to be accompanied by long-term improvements in productivity to reduce inflation, lever up the competitiveness of exports and ensure the sustainability of the external value of domestic currency.     

Exchange rate uncertainty and the level of investment in selected South-east Asian countries

The effect of real exchange rate uncertainty on aggregate private investment in Indonesia, Malaysia, the Philippines and Thailand is examined using time series data from 1972–2000. Since the use of non-stationary time series data may produce spurious results, the data series are tested for stationarity using the augmented Dickey–Fuller and Phillips–Perron tests. After establishing the stationarity of the data series, cointegration tests are performed. The cointegration test results reject the hypothesis of no cointegration. Therefore, an error correction model is developed and estimated. The estimated results point to an inconclusive empirical relationship between real exchange rate volatility and aggregate private investment.     

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.     

Accounting for China's Saving‐Investment Imbalance from 2002–2008

This paper decomposes and analyzes China's saving‐investment imbalance (equivalent to current account imbalance) from 2002–2008. We first use the Flow of Funds Accounts to calculate the saving and investment rates (propensity) of the household, corporate and government sectors and to evaluate their relative contribution to the aggregate saving‐investment surplus. The results indicate that the increase of saving‐investment surplus can be attributed to the steady increase of saving by the household and government sectors and the short‐term downsizing of investment by the corporate and government sectors. We then use more disaggregate supplementary datasets to explore the factors behind the evolution of the saving and investment rates for the three sectors. The rise of the household saving rate mainly sources from the urban sector. The corporate saving rate experienced a steady increase because of the rise of profitability. Government macroeconomic policies have had a strong influence on the saving and investment patterns of the corporate and government sectors.     

Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach

Abstract. A structural vector error correction (SVEC) model is used to investigate several monetary policy issues. While being data-oriented the SVEC framework allows structural modeling of the short-run and long-run properties of the data. The statistical model is estimated with monthly German data for 1975–98 where a structural break is detected in 1984. After splitting the sample, three stable long-run relations are found in each subsample which can be interpreted in terms of a money-demand equation, a policy rule and a relation for real output, respectively. Since the cointegration restrictions imply a particular shape of the long-run covariance matrix this information can be used to distinguish between permanent and transitory innovations in the estimated system. Additional restrictions are introduced to identify a monetary policy shock.     

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.     

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.     

Instability in cointegration regressions: a brief review with an application to money demand in Portugal

This study addresses some modelling questions related to the possibility of structural change in models with nonstationary variables. Focusing on cointegration issues, some methodological aspects are discussed, attempting to integrate coherently the several steps of the modelling strategy. These range from unit root to cointegration testing and to testing for instability in the cointegration vector. An empirical example with Portuguese data tries to illustrate the usefulness of this approach, where a simple money demand function is estimated using an error-correction model (ECM). If a break is explicitly allowed in the cointegration vector the forecasting performance of the ECM improves.     

SAVING AND FLOW OF FUNDS ANALYSIS: A TOOL FOR FINANCIAL PLANNING IN INDIA*

Overall balance between expected available resources and planned investment is not sufficient to ensure development with stability. Imbalances and inflationary pressures could develop as a result of inconsistencies between sector-wise investment structure and the sector-wise structure of saving. This means that the dichotomy between real and financial planning needs to be eliminated not only at the national level but at the sectoral levels as well, so that the sector-wise investment pattern is consistent with the emerging structure of saving and the flow-of-funds. This presents an analysis of the structure of saving and flow-of-funds in India, shows how it is actually used for the purpose of financial planning, and attempts to derive a formalized technique of financial planning. Analysis of the structure of saving in India during 1954–1955 to 1967–1968 indicates the importance of the household sector as the net lending sector to the borrowing sectors, the government and the private corporate sectors. On the basis of the feasible sectoral rates of growth in income and the past trends in sectoral saving-income ratios and household saving pattern with such modifications as are necessary in the light of expected changes in various policies, sector-wise saving structure and the pattern of household sector saving are projected for the Fourth Plan period (1969–1974). Then a flow-of-funds matrix is prepared to derive sector-wise investment estimates as are consistent with the estimated structure of saving and the likely changes in the lending policies of the financial institutions. A formalized technique of financial planning based on the Indian planning experience is presented in the last section of the paper.     

Purchasing Power Parity By sectors From Selected European Countries: Cointegration and Structural Breaks

In this paper we study the long-run Purchasing Power Parity (PPP) hypothesis by traded and non-traded sectors using cointegration techniques in the presence of structural breaks, for a set of European countries during the period 1975:1-1995:12. This approach is complementary to many existing approaches to investigate the PPP Hypothesis. We find evidence in favor of long-run PPP hypothesis when commodity prices and used in the presence of structural breaks. This result lends support to the integration process in the European Union. [C22, F30]     

Balanced growth and structural breaks: evidence for Germany

One of the central hypotheses of the neoclassical growth literature is the balanced-growth hypothesis, which predicts that output, consumption and investment grow at the same rate. Empirically, this implies that the consumption-to-output ratio and the investment-to-output ratio must be stationary and that consumption and investment must be cointegrated with output. This article tests these implications with respect to Germany, using unit root tests and cointegration techniques that allow for an endogenously determined structural break. We find that the long-run growth path of the German economy is consistent with the balanced-growth hypothesis if we allow for a structural break associated with the worldwide productivity slowdown of the early 1970s.     

A contribution of foreign direct investment,clean energy,trade openness,carbon emissions and economic growth to energy demand in UAE

This paper investigates the relationship between foreign direct investment, clean energy, trade openness, carbon emissions and economic growth in case of UAE covering the period of 1975Q1–2011Q4. We have tested the unit properties of variables in the presence of structural breaks. The ARDL bounds testing approach is applied to examine the cointegration by accommodating structural breaks stemming in the series. The VECM Granger causality approach is also applied to investigate the causal relationship between the variables. Our empirical findings confirm the existence of cointegration between the series. We find that foreign direct investment, trade openness and carbon emissions decline energy demand. Economic growth and clean energy have positive impact on energy consumption.     

Technology and labor regulations: theory and evidence

This paper shows that different labor market policies can lead to differences in technology across sectors in a model of labor saving technologies. Labor market regulations reduce the skill premium and as a result, if technologies are labor saving, countries with more stringent labor regulation, which bind more for low skilled workers, become less technologically advanced in their high skill sectors, but more technologically advanced in their low skill sectors. We then present data on capital-output ratios, on estimated productivity levels and on patent creation, which tend to support the predictions of our model.     

Sectoral Capital–Labor Ratios and Total Factor Productivity: Evidence from Asia

This paper examines the relationship between sectoral capital–labor ratios and total factor productivity (TFP) for six Asian economies in the context of the Balassa–Samuelson model. A strong prediction of the model is that the capital–labor ratios in both the traded‐ and nontraded‐goods sectors depend on the TFP in the traded‐goods sector. Both single‐equation and panel cointegration tests support this implication of the model.     

EVIDENCE ON FEATURES OF A DSGE BUSINESS CYCLE MODEL FROM BAYESIAN MODEL AVERAGING*

The empirical support for features of a Dynamic Stochastic General Equilibrium model with two technology shocks is evaluated using Bayesian model averaging over vector autoregressions. The model features include equilibria, restrictions on long‐run responses, a structural break of unknown date, and a range of lags and deterministic processes. We find support for a number of features implied by the economic model, and the evidence suggests a break in the entire model structure around 1984, after which technology shocks appear to account for all stochastic trends. Business cycle volatility seems more due to investment‐specific technology shocks than neutral technology shocks.     

Testing the validity of the monetary model for ASEAN with structural break

This study examines the validity of the long run structural relations underlying the monetary exchange rate model for Malaysia, Singapore, The Philippines and Thailand. Take into consideration the possibility of structural change, we examined the models using recent developed techniques of testing unit root and cointegration with a structural break. Our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations. The long run relationships were able to be interpreted according to the theory, hence, support the long run validity of the monetary exchange rate model.     

A new approach to estimation of the R&D–innovation–productivity relationship

ABSTRACT

We apply a generalized structural equation model approach to the estimation of the relationship between R&D, innovation and productivity that focuses on the potentially crucial heterogeneity across sectors. The model accounts for selectivity and handles the endogeneity of this relationship in a recursive framework which allows for feedback effects from productivity to future R&D investment. Our approach enables the estimation of the different equations as one system, allowing the coefficients to differ across sectors, and also permits us to take cross-equation correlation of the errors into account. Employing a panel of Swedish manufacturing and service firms observed in three consecutive Community Innovation Surveys in the period 2008–2012, our full-information maximum likelihood estimates show that many key channels of influence among the model's components vary meaningfully in their statistical significance and magnitude across six different sectors based on the OECD classification on technological and knowledge intensity. These results cast doubt on earlier research which does not allow for sectoral heterogeneity.     

THE TRANSMISSION OF MONETARY POLICY IN A MULTISECTOR ECONOMY*

This article constructs and estimates a sticky‐price, Dynamic Stochastic General Equilibrium model with heterogeneous production sectors. Firms in different sectors vary in their price rigidity, production technology, and the combination of material and investment inputs. In particular, firms buy inputs from all sectors using the actual Input–Output Matrix and Capital Flow Table of the U.S. economy. By relaxing the standard assumption of symmetry, this model allows idiosyncratic sectoral dynamics in response to monetary policy shocks. The model is estimated by the Generalized Method of Moments using sectoral and aggregate U.S. time series.