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A new look at the Feldstein-Horioka puzzle: a European-regional perspective

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  • Jérome Hericourt
  • Mathilde Maurel

Abstract

This paper wants to assess the extent of financial integration in the European Union using the Feldstein-Horioka criterion applied to regional data over the 1995-2000 period. Our article highlights several important outcomes. First, we find evidence that there is no correlation between savings and investment inside most of the considered countries, and we are able to solve the few puzzles facing us. Second, we find that overall financial integration between EU regions is almost complete. Additional investigations on consistent sub-groups of regions confirm that the withdrawal of institutional barriers to capital mobility is a powerful tool to achieve financial integration. However, we show that financial integration as measured by the Feldstein-Horioka relationship is impeded by distance and linguistic diversity, interpreted as proxies for transaction and information costs.

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  • Jérome Hericourt & Mathilde Maurel, 2006. "A new look at the Feldstein-Horioka puzzle: a European-regional perspective," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 49(2), pages 147-168.
    • Handle: RePEc:bxr:bxrceb:y:2006:v:49:i:2:p:147-168
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    More about this item

    Keywords

    regional savings; investment; capital market; capital flows;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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