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Testing the Degree of Openness of the Greek Capital Account: A Cointegration Analysis

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  • Paleologos J.
  • Georgantelis S.
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    Abstract

    The issue of capital mobility and the related issue of financial market integration is one of the most pronounced cases of contradiction between casual empiricism and conventional wisdom, in the one hand, and the results of formal empirical testing on the other. The question of the degree of capital mobility is an important one in economic analysis. This is because the assumptions one makes about the degree to which capital is mobile internationally can significantly influence the conclusions of the analysis. Over the past decade developing countries have experienced a continuing process of financial market liberalization and growing financial flows. Measuring the degree of capital mobility – defined as the degree of linkage between domestic and foreign interest rates – is central to our understanding and assessment of financial liberalization and its consequences. There are some methodological issues concerning the degree of capital mobility: The connection between capital mobility and market integration seems to be clear; if markets are integrated then capital will move more freely. Feldstein and Horioka (1980) have proposed to measure capital mobility using the degree of correlation between saving and investment rates. The Ferdstein-Horioka criterion also implies that capital mobility can be measured on the basis of differential (nominal and real) rates of interest. However, other researchers argued that the saving-investment correlation is not a proper measure of the degree of capital mobility and market integration (Goldstein et al, 1991), Frankel and MacArthur (1988). In this paper, following Edwards and Khan (1985), the domestic interest rate is hypothesized to depend on weighted average of domestic and foreign factos. The approach that was used is maximum likelihood cointegration analysis of Johansen (1988), and Johansen and Juseliu (1990). The results support the impact of both domestic and international influences on the domestic rate in the case of Greek economy. The evidence based on the Edwards and Khan (1985) approach seems to support the hypothesis of high (but not perfect) capital mobility in the Greek economy. The capital is highly mobile.

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    Bibliographic Info

    Article provided by European Research Studies Journal in its journal European Research Studies Journal.

    Volume (Year): V (2002)
    Issue (Month): 3-4 (July-December)
    Pages: 59-70

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    Handle: RePEc:ers:journl:v:v:y:2002:i:3-4:p:59-70

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    1. Paleologos, John M. & Georgantelis, Spyros E., 1999. "Does the Fisher Effect Apply in Greece? A Cointegration Analysis," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 52(2), pages 229-243.
    2. Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
    3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    4. Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, vol. 102(414), pages 1162-70, September.
    5. 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.
    6. Thornton, John, 1997. "Investment and Saving in an Open Economy: Further Results," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 50(1), pages 111-116.
    7. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
    8. Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," Papers 64, Brookings Institution - Working Papers.
    9. Rungsun Hataiseree & Anthony Phipps, 1996. "The degree of capital mobility in Thailand: some estimates using a cointegration approach," Applied Economics Letters, Taylor & Francis Journals, vol. 3(1), pages 9-13.
    10. repec:fth:harver:1463 is not listed on IDEAS
    11. Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34.
    12. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    13. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    14. Krol, Robert, 1996. "International capital mobility: evidence from panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 467-474, June.
    15. Moosa , Imad A., 1997. "Resolving the Feldstein-Horioka Puzzle," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 50(3), pages 437-458.
    16. Alogoskoufis, George & Smith, Ron, 1991. " On Error Correction Models: Specification, Interpretation, Estimation," Journal of Economic Surveys, Wiley Blackwell, vol. 5(1), pages 97-128.
    17. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    18. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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