The quantity approach to financial integration: The Feldstein-Horioka criterion revisited |
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Authors: | Jan J G Lemmen Sylvester C W Eijffinger |
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Institution: | (1) Department of Economics and Center for Economic Research, Tilburg University, The Netherlands |
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Abstract: | This paper applies the Feldstein-Horioka criterion, that is, the role of savings-investment correlations, to assess the degree of financial integration in the European Community. We establish a link between the Feldstein-Horioka criterion and three other criteria for financial integration: the covered, uncovered, and real interest parity condition. Subsequently, we evaluate the Feldstein-Horioka criterion for financial integration on the basis of its underlying assumptions. The paper performs both cross-section and time-series analyses of savings-investment correlations. The time-series analysis relies on the concept of cointegration. Our major finding is that the Feldstein-Horioka criterion—contrary to what is usually found in world financial markets—is able to explain an increasing degree of financial integration in the European Community.Symbols S
gross national savings
- I
gross domestic investment
- C
total private and government final consumption expenditure
- M
import of goods and services
- X
export of goods and services
- Y
gross domestic product
- CA
current account of the balance of payments
- GNP
gross national product
- NCT
net current transfers from the rest of the world
- NFI
net factor income from the rest of the world
- FCF
gross fixed capital formation
- ST
increase in stocks
- Sp
gross national savings by the private sector
- Sg
gross national savings by the public sector
- Ip
gross domestic investment by the private sector
- Ig
gross domestic investment by the government sector
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corrected for a nonzero value of the statistical discrepancy |
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Keywords: | financial integration savings investment European Community |
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