Obstfeld and Rogoff׳s international macro puzzles: a quantitative assessment

Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton et al. (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of puzzles. The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein and Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.     

Savings and investments in the OECD, 1970–2007: A test of panel cointegration with regime changes

In this paper we test for the existence of a long-run relationship between investment and savings (the Feldstein–Horioka puzzle) in a panel of 18 OECD countries, 1970–2007, allowing for heterogenous breaks in the coefficients. For this purpose we develop a bootstrap panel cointegration with breaks robust to cross-section dependence, shown by simulation to enjoy good size and power properties provided that some care is applied in its use. The tests suggest that, even allowing for parameter shifts in the countries where capital control regulations changed in the sample period, there is no evidence of an investment–savings long-run relationship for the panel as a whole.     

European Integration and the Feldstein–Horioka Puzzle

We apply the differences‐in‐differences method to study the effect of the European single market in 1993 and the euro in 1999 on the Feldstein–Horioka equation where countries outside the single market serve as a control group and those within as a treatment group. We find structural breaks that coincide with both events, in addition to the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, the pattern of capital flows within the single market leaves a significant part of the flows unexplained by fundamentals.     

The real effects of inflation in a developing economy with external debt and sovereign risk

In this paper we develop an intertemporal optimizing model to examine the real effects of inflation induced by monetary policy in an open developing economy with external debt and sovereign risk. The economy faces an upward sloping supply curve of debt. In our model, households require real balances in advance for consumption expenditures, and monetary policy involves targeting the inflation rate. We show that an increase in the inflation rate leads to a decrease in the stock of foreign debt. It also leads to a decrease in consumption, employment, capital accumulation and output in the long run. Our results show that the accumulation of foreign debt exhibits non-monotonic adjustment. Particularly, an increase in the inflation rate leads to a current account surplus followed by a deficit. Along with this non-monotonicity, our model also explains the positive correlation between savings and investment during the transitional periods (Feldstein–Horioka puzzle).     

Capital mobility in the Caucasus

This paper examines the degree of capital mobility in the countries of the Caucasus. I estimate a simple model developed in the seminal paper by Feldstein and Horioka (1980). I construct a panel of 6 countries of the Caucasus – Armenia, Azerbaijan, Georgia, Kazakhstan, Russia, and Turkey – and employ a panel cointegration approach. To that end, I make use of the Dynamic OLS (DOLS), Fully Modified OLS (FMOLS), and Pooled Mean Group (PMG) techniques for heterogeneous panels. Preliminary cross-dependency tests reject the presence of cross-sectional dependence. Panel unit root and cointegration tests confirm that investment and saving are non-stationary and cointegrated. The estimated long-run saving retention ratios using DOLS, FMOLS, and PMG are 0.90, 0.73, and 0.83, respectively. These results suggest that capital mobility in the Caucasus is very low. I put these findings in an international context and confirm that the Caucasus is considerably financially restrained compared to other regions. I also look at the country ratings of the Index of Economic Freedom (IEF) and find that my results work well in predicting the IEF rank. Finally, I discuss some implications for the region's policy-relevant issues such as financial integration, human capital mobility, cross-border trading, fiscal and monetary policy, solvency management, responsive consumption smoothing, and recession resistance.     

The Feldstein–Horioka Puzzle and Twin Deficits in Selected Countries

Hysteresis (unit root) of the current account, fiscal balance, and investment shares is found for the majority of industrial countries as well as selected emerging and transition economies between 1970 and 2001. Twin deficits are defined as a positive long-run relationship between the current account and the fiscal balance. The paper provides evidence for twin deficits in several countries, although we can see differences between the 1980s and the 1990s. Investment in some EU countries is financed to a relatively high degree at the international financial markets implying that the Feldstein–Horioka puzzle is less important in the EU.     

我国区域资本流动与区域经济协调发展

采用Feldstein and Horioka(1980)模型,考察了1985～2006年间我国的区域资本流动性,发现我国的区域资本流动性是不断增强的。然后,从区域资本流动的方向、区域资本流动对我国区域经济差距的影响两个方面考察了区域资本流动对我国区域经济协调发展的影响,结果表明,区域资本流动对于促进我国区域经济的协调发展具有积极的影响。     

Capital accumulation and growth: a new look at the empirical evidence

Using annual data for 75 countries in the period 1960–2000, we present evidence of a positive relationship between investment as a share of gross domestic product (GDP) and the long‐run growth rate of GDP per worker. This result is robust for our full sample and for the subsample of non‐OECD countries, but not for the subsample of OECD countries. Our analysis controls for time‐invariant country‐specific heterogeneity in growth rates, and for a range of time‐varying control variables. We also address endogeneity issues, and allow for heterogeneity across countries in model parameters and for cross‐section dependence. Copyright © 2010 John Wiley & Sons, Ltd.     

The Feldstein-Horioka puzzle and capital mobility: The role of the recent financial crisis

The Feldstein-Horioka (FH) puzzle has long been debated as it relates to the important topics of capital mobility and how to determine levels of investment. Adopting a recursive approach and panel techniques, this paper explores the impacts of the recent financial crisis on the validity of the puzzle. The OECD’s saving-investment correlation dropped to a record low just before the 2008 crisis began, reflecting the perceived ‘end’ of the FH puzzle in some studies. But since the onset of the crisis, our results indicate that this correlation has increased, suggesting the puzzle’s return. The puzzle for net capital-importing and net capital-exporting countries differs, with the relationship being more significant for the exporters compared to the importers, reflecting the asymmetry in terms of the degree of shocks across countries.     

The Feldstein–Horioka puzzle in Latin American and Caribbean countries: a panel cointegration analysis

In this paper, the recently developed panel unit root and the Pedroni cointegration tests are applied to empirically examine the validity of the Feldstein–Horioka puzzle (F–H puzzle) for a heterogeneous panel of 14 Latin American and five Caribbean countries over the period, 1960–2002. The findings indicate that in these countries, the long-run solvency condition is maintained. Finally, employing the Pedroni panel group FM-OLS estimator (2000, 2001), it is found that the statistically significant estimated savings-retention coefficient for the panel is relatively small indicating that the F–H Puzzle is not valid and thus implying the prevalence of a moderate degree of capital mobility.

Openness,size, and the saving–investment relationship

It is commonly believed that since saving is a source of funding for investment, any policy that is designed to stimulate saving, will also stimulate investment. This paper re-examines the relationship between national saving and investment. Results from a panel of 126 economies over the period 1960–2000 provide strong support for systematic effects of country-size as well as openness on the saving–investment relationship.     

The causal relation between government revenue and spending: Evidence from Egypt and Jordan

In investigating the causal relation between government revenue and spending, our empirical results support the tax-and-spend hypothesis for Egypt and the fiscal synchronization hypothesis for Jordan. Breaking away from these historical trends is essential for both countries to eliminate the budget deficit and therefore ensure the availability of domestic saving for private investment. To cope with unemployment and poverty, continuing privatization is recommended for both countries to improve productivity and efficiency in the domestic economy. Privatization should lead to higher domestic saving and investment and at the same time eliminate the budget deficit by enhancing revenue and curbing spending. (JEL H62, H63)     

THE DISTANCE PUZZLE AND LOW‐INCOME COUNTRIES: AN UPDATE

The ‘distance effect' measuring the elasticity of trade flows to distance has been found to be rising since the early 1970s in a host of studies based on the gravity model, leading observers to call it the ‘distance puzzle'. However, this puzzle is regularly challenged by new developments in the specification of the gravity equation or in its estimations. We propose an original survey on the existing methods used to quantify the distance puzzle – basically the computation of an average distance of trade, a meta‐analysis on existing gravity papers and the implementation of recent econometric developments, all on a well‐specified gravity equation both in cross‐section and panel data. We apply all these methods to a unique large database (124 countries from 1970 to 2006). It appears that if all these new developments can change the amplitude of the increase in the trade elasticity to distance, none solve the distance puzzle. We confirm the existence of this puzzle and identify that it only applies to low‐income countries which exhibit a significant rising distance effect on their trade of around 18% between 1970 and 2006 while the distance ‘puzzle' for trade within richer countries disappears.     

Assessing the Transmission of Monetary Policy Using Time‐varying Parameter Dynamic Factor Models*

This article extends the current literature which questions the stability of the monetary transmission mechanism, by proposing a factor‐augmented vector autoregressive (VAR) model with time‐varying coefficients and stochastic volatility. The VAR coefficients and error covariances may change gradually in every period or be subject to abrupt breaks. The model is applied to 143 post‐World War II quarterly variables fully describing the US economy. I show that both endogenous and exogenous shocks to the US economy resulted in the high inflation volatility during the 1970s and early 1980s. The time‐varying factor augmented VAR produces impulse responses of inflation which significantly reduce the price puzzle. Impulse responses of other indicators of the economy show that the most notable changes in the transmission of unanticipated monetary policy shocks occurred for gross domestic product, investment, exchange rates and money.     

Foreign direct investment and global sourcing choices of firms in the US

This paper investigates factors affecting the global sourcing choices of firms in the US: (1) US investment abroad; (2) foreign direct investment in the US; (3) wage–productivity ratio; and (4) transaction cost. I found that there is a statistically significant association between the country of sourcing choices and foreign direct investment. Both the wage–productivity ratios and transaction costs are not statistically significant at the conventional significance level, but their regression coefficients show proper signs. The paper also examines the patterns of foreign direct investment among countries and compares transaction costs by income group. Copyright © 2000 John Wiley & Sons, Ltd.     

Corporate governance and the returns to acquiring firms' shareholders: an international comparison

We examine the effects of mergers on the returns to acquiring companies' shareholders for a large sample of companies from both Anglo‐Saxon and non‐Anglo‐Saxon countries over the 1980s and 1990s. With the important exception of Japan, we find similar patterns of returns across both types of countries. For a sample of 9733 acquiring companies the mean percentage gain over a short window of 21 days is 0.6%. This picture changes dramatically as the market has more time to evaluate the mergers and/or the acquiring firms. After three years, acquirers' shareholders in the United States and continental Europe lost on average 19% of their market value compared to a portfolio of non‐merging firms in their size deciles and their two‐digit industry, in Canada, Australia and New Zealand roughly 16%, and in the four Scandinavian countries almost 15%. Further analysis indicates that some mergers are consistent with the hypothesis that mergers generate synergies, but that a majority of mergers in Continental Europe are explained by the managerial discretion and/or hubris hypothesis. Our findings also suggest that corporate governance institutions in the United States and the other Anglo‐Saxon countries lead to better investment performance than in continental Europe, when one confines one's attention to mergers. Copyright © 2007 John Wiley & Sons, Ltd.     

Savings and investment rates in Latin America: An error correction analysis

Using savings and investment rates from fifteen Latin and Central American countries, this study explores the possibility of a long-run relationship between saving and investment. The analysis consists of regressions unit root tests, and an error correction model developed by Jansen and Schulze (1996) and Jansen (1996). Of the 15 countries, there is evidence to substantiate capital mobility in 13 countries. For Chile and Uruguay, countries that have experienced considerable capital controls, evidence indicates the lack of capital mobility for these two countries.     

Time Series Based Errors and Empirical Errors in Fertility Forecasts in the Nordic Countries*

We use ARCH time series models to derive model based prediction intervals for the Total Fertility Rate (TFR) in Norway, Sweden, Finland, and Denmark up to 2050. For the short term (5–10 yrs), expected TFR‐errors are compared with empirical forecast errors observed in historical population forecasts prepared by the statistical agencies in these countries since 1969. Medium‐term and long‐term (up to 50 years) errors are compared with error patterns based on so‐called naïve forecasts, i.e. forecasts that assume that recently observed TFR‐levels also apply for the future.     

DOES INVESTOR PROTECTION INCREASE FOREIGN DIRECT INVESTMENT? A META‐ANALYSIS

We undertake a meta‐analysis of the effects of international investment agreements for the protection of foreign investors on foreign direct investment using 2107 estimates drawn from 74 studies. Our meta‐analysis finds robust evidence that effect of international investment agreements is so small as to be considered zero.  However, our results do not rule out the possibility that the effect of these agreements is, in fact, positive and that current research methods are insufficiently powerful or precise to identify the underlying genuine effect. FDI from developed countries appears to be more responsive to the existence of investment protection, and there is evidence of publication–selection bias in favour of studies that find a positive effect for investor protection.     

Thrifty firms and thriftless households are risks to growth

• ? Structural changes in savings behaviour by households and especially firms in advanced economies in recent years pose threats to global growth. Household savings may have been compressed by high wealth levels, pointing to the risk of a sharp rise in saving and fall in spending if asset prices correct. One positive compared to a decade ago, however, is that US personal saving is less depressed than then.
• ? The bigger risk is arguably on the corporate side, where firms' net savings have risen on average by 2–3 percentage points of GDP since the early 1990s. This has been accompanied by weakening investment, especially in net terms. The reasons behind this are varied – post‐crisis caution, demographic factors and a shift to R&D intensive industry may all have played a role. But a key factor is likely to have been changes in incentives facing executives, leading them to prioritise stock buybacks over investment. This risks creating a long‐term low‐growth feedback loop.