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The Feldstein-Horioka Puzzle And Transition Economies

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  • Despina Petreska
  • Nikica Mojsoska-Blazevski

Abstract

The objective of this paper is to investigate the existence of the Feldstein and Horioka puzzle in transition countries, divided into three groups of countries: South-East Europe (SEE), Central and Eastern Europe (CEE), and the Commonwealth of Independent States (CIS). Central to this puzzle is the β coefficient, which measures the relationship between domestic savings and investment. In their seminal paper from 1980 Feldstein and Horioka estimated a value of the β coefficient close to 1, which in their opinion indicates low capital mobility as opposed to the theory and the conventional wisdom of perfect capital mobility. We use annual data for the period 1991-2010 and panel cointegration econometric technique to examine this relationship in three panels of countries (SEE, CEE, and CIS). We find that the puzzle of Feldstein and Horioka exists in all three panels, but the connection between savings and investment is generally lower than 1. As we move towards a panel composed of the larger and richer countries the value of the β coefficient increases. Moreover, the coefficient of adjustment of the disequilibrium between domestic savings and investment is positive in all cases, indicating that any imbalance between savings and investment is not corrected immediately.

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Bibliographic Info

Article provided by Faculty of Economics, University of Belgrade in its journal Economic Annals.

Volume (Year): 58 (2013)
Issue (Month): 197 (April – June)
Pages: 23-46

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Handle: RePEc:beo:journl:v:58:y:2013:i:197:p:23-46

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Related research

Keywords: Feldstein-Horioka puzzle; domestic savings; investment; capital mobility; panel cointegration; transition economies;

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References

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  1. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  2. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1998. "The Feldstein-Horioka Puzzle and Capital Mobility: A Review," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(2), pages 169-88, April.
  3. Golub, Stephen S., 1990. "International capital mobility: net versus gross stocks and flows," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 424-439, December.
  4. James E. Payne & Risa Kumazawa, 2006. "Capital Mobility And The Feldstein-Horioka Puzzle: Re-Examination Of Less Developed Countries," Manchester School, University of Manchester, vol. 74(5), pages 610-616, 09.
  5. Arusha Cooray & Dipendra Sinha, 2007. "The Feldstein-Horioka model re-visited for African countries," Applied Economics, Taylor & Francis Journals, vol. 39(12), pages 1501-1510.
  6. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
  7. Kasuga, Hidefumi, 2004. "Saving-investment correlations in developing countries," Economics Letters, Elsevier, vol. 83(3), pages 371-376, June.
  8. Jerry Coakley & Ana-Maria Fuertes & Fabio Spagnolo, 2004. "Is the Feldstein-Horioka Puzzle History?," Manchester School, University of Manchester, vol. 72(5), pages 569-590, 09.
  9. Sinha, Tapen & Sinha, Dipendra, 2004. "The mother of all puzzles would not go away," Economics Letters, Elsevier, vol. 82(2), pages 259-267, February.
  10. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
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  12. Wong, David Y., 1990. "What do saving-investment relationships tell us about capital mobility?," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 60-74, March.
  13. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2009. "Are Eu Budget Deficits Stationary?," Working Paper Series 17_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
  14. Natalya Ketenci, N., 2010. "The Feldstein Horioka Puzzle by groups of OECD members: the panel approach," MPRA Paper 25848, University Library of Munich, Germany.
  15. Jerry Coakley & Ana-Maria Fuertes & Fabio Spagnolo, 2004. "The Feldstein-Horioka puzzle is not as bad as you think," Money Macro and Finance (MMF) Research Group Conference 2003 17, Money Macro and Finance Research Group.
  16. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  17. Bahmani-Oskooee, Mohsen & Chakrabarti, Avik, 2005. "Openness, size, and the saving-investment relationship," Economic Systems, Elsevier, vol. 29(3), pages 283-293, September.
  18. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 327-342, December.
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