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The quantity approach to financial integration: The Feldstein-Horioka criterion revisited

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  • Jan Lemmen
  • Sylvester Eijffinger

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. Copyright Kluwer Academic Publishers 1995

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 6 (1995)
Issue (Month): 2 (April)
Pages: 145-165

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Handle: RePEc:kap:openec:v:6:y:1995:i:2:p:145-165

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: financial integration; savings; investment; European Community;

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References

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  1. Lemmen, J.J.G. & Eijffinger, S.C.W., 1993. "The degree of financial integration in the European Community," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152892, Tilburg University.
  2. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
  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. Hakkio, Craig S. & Rush, Mark, 1991. "Cointegration: how short is the long run?," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 571-581, December.
  5. Monadjemi, M, 1990. "Testing the Degree of International Capital Mobility," Australian Economic Papers, Wiley Blackwell, vol. 29(54), pages 30-39, June.
  6. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  7. 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.
  8. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-36, June.
  9. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
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  11. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 369-84, July.
  12. Martin Feldstein, 1991. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353 National Bureau of Economic Research, Inc.
  13. Tobin, James, 1983. "'Domestic saving and international capital movements in the long run and the short run' by M. Feldstein," European Economic Review, Elsevier, vol. 21(1-2), pages 153-156.
  14. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
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  16. Jansen, W Jos & Schulze, Gunther G, 1996. "Theory-Based Measurement of the Saving-Investment Correlation with an Application to Norway," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 116-32, January.
  17. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, 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.
  19. Jeffrey A. Frankel, 1985. "International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?," NBER Working Papers 1773, National Bureau of Economic Research, Inc.
  20. 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.
  21. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January.
  22. Maurice Obstfeld, 1986. "How Integrated are World Capital Markets? Some New Tests," NBER Working Papers 2075, National Bureau of Economic Research, Inc.
  23. Martin Feldstein & Philippe Bacchetta, 1991. "National Saving and International Investment," NBER Chapters, in: National Saving and Economic Performance, pages 201-226 National Bureau of Economic Research, Inc.
  24. 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.
  25. D. F. I. Folkerts-Landau & Donald J. Mathieson & Morris Goldstein & Liliana Rojas-Suárez & José Saúl Lizondo & Timothy D. Lane, 1991. "Determinants and Systemic Consequences of International Capital Flows," IMF Occasional Papers 77, International Monetary Fund.
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Citations

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Cited by:
  1. Michele Fratianni, 2004. "Borders and the Constraints on Globalization," Working Papers 2004-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Coakley, Jerry & Kulasi, Farida, 1997. "Cointegration of long span saving and investment," Economics Letters, Elsevier, vol. 54(1), pages 1-6, January.
  3. Chan, Tze-Haw & Khong, Wye Leong Roy & Baharumshah, Ahmad Zubaidi, 2003. "Dynamic Financial Linkages of Japan and ASEAN Economies: An Application of Real Interest Parity," MPRA Paper 2209, University Library of Munich, Germany, revised 2003.
  4. Herwartz, Helmut & Xu, Fang, 2007. "A functional coefficient model view of the Feldstein-Horioka puzzle," Economics Working Papers 2007,14, Christian-Albrechts-University of Kiel, Department of Economics.
  5. Ozmen, Erdal & Parmaksiz, Kagan, 2003. "Policy regime change and the Feldstein-Horioka puzzle: the UK evidence," Journal of Policy Modeling, Elsevier, vol. 25(2), pages 137-149, February.
  6. Vo, Xuan Vinh & Daly, Kevin James, 2007. "The determinants of international financial integration," Global Finance Journal, Elsevier, vol. 18(2), pages 228-250.
  7. Lucio Sarno & Mark Taylor, 1998. "Exchange controls, international capital flows and saving-investment correlations in the UK: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(1), pages 69-98, March.
  8. Lemmen, J.J.G. & Eijffinger, S.C.W., 1996. "The Price Approach to Financial Integration: Decomposing European Money Market Interest Rate Differentials," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73026, Tilburg University.
  9. Bartram, Sohnke M. & Taylor, Stephen J. & Wang, Yaw-Huei, 2007. "The Euro and European financial market dependence," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1461-1481, May.
  10. Erdal Ozmen & Kağan Parmaksiz, 2003. "Exchange rate regimes and the Feldstein-Horioka puzzle: the French evidence," Applied Economics, Taylor & Francis Journals, vol. 35(2), pages 217-222.
  11. Lemmen, J.J.G. & Eijffinger, S.C.W., 1996. "The Fundamental Determinants of Financial Integration in the European Union," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73027, Tilburg University.
  12. Westerlund, Joakim, 2005. "Testing for Panel Cointegration with Multiple Structural Breaks," Working Papers 2005:12, Lund University, Department of Economics.
  13. Chan, Tze-Haw & Baharumshah, Ahmad Zubaidi, 2003. "Measuring Capital Mobility in the Asia Pacific Rim," MPRA Paper 2208, University Library of Munich, Germany, revised 2004.
  14. Stirböck, Claudia & Heinemann, Friedrich, 1999. "Capital Mobility within EMU," ZEW Discussion Papers 99-19, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  15. Söehnke Bartram & Stephen Taylor & Yaw-Huei Wang, 2004. "The Euro and European Financial Market Integration," Money Macro and Finance (MMF) Research Group Conference 2004 49, Money Macro and Finance Research Group, revised 13 Oct 2004.

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