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Cointegration with Structural Breaks : An Application to the Feldstein-Horioka Puzzle

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  • Mohitosh Kejriwal

    ()

  • Pierre Perron

    ()

Abstract

This paper revisits the well known Feldstein-Horioka saving-investment correlation puzzle from a time series perspective using a sample of 21 OECD countries. We argue that the strong positive correlation between saving and investment as originally identified by Feldstein and Horioka (1980) arises due to the neglect of the nonstationary properties of the variables as well as the failure to account for potential instabilities in the long run relationship between them. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2006a) as well as the cointegration test in Arai and Kurozumi (2005) extended to allow for multiple breaks under the null hypothesis of cointegration. Our empirical results show that for all countries except Mexico and the U.K., the cointegrating relationship has changed over time; in most cases, the change being towards a lower saving-investment correlation regime. This is perfectly consistent with the recent evidence on international diversification and integration of world capital markets. Finally, we find that while the saving-investment link bears a close relationship with the degree of openness of the country, there seems to be very little evidence in favour of the commonly held view that the correlation varies with the size of the country.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-057.

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Length: pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-057

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Cited by:
  1. Estela Sáenz & Marcela Sabaté & M. Gadea, 2013. "Trade openness and public expenditure. The Spanish case, 1960–2000," Public Choice, Springer, vol. 154(3), pages 173-195, March.
  2. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 1305, Department of Applied Economics II, Universidad de Valencia.
  3. Ketenci, Natalya, 2013. "The Feldstein–Horioka puzzle in groupings of OECD members: A panel approach," Research in Economics, Elsevier, vol. 67(1), pages 76-87.
  4. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
  5. Chu, Kam Hon, 2012. "The Feldstein-Horioka Puzzle and Spurious Ratio Correlation," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 292-309.
  6. Alexander Ludwig, 2013. "Testing the null of cointegration with a structural break: optimal kernel and bandwidth selection," Economics Bulletin, AccessEcon, vol. 33(4), pages 2828-2839.
  7. Mustafa SAATCÝ & Yasemin DUMRUL, 2013. "The Relationship Between Energy Consumption and Economic Growth: Evidence From A Structural Break Analysis For Turkey," International Journal of Energy Economics and Policy, Econjournals, vol. 3(1), pages 20-29.
  8. Natalya Ketenci, N., 2010. "The Feldstein Horioka Puzzle by groups of OECD members: the panel approach," MPRA Paper 25848, University Library of Munich, Germany.
  9. Di Iorio, Francesca & Fachin, Stefano, 2007. "Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle," Economics Discussion Papers 2007-39, Kiel Institute for the World Economy.
  10. Emilio Congregado & Vicente Esteve & Antonio A. Golpe, 2013. "From complements to substitutes: Structural breaks in the elasticity of substitution between paidemployment and self-employment in the US," Working Papers 09/13, Instituto Universitario de Análisis Económico y Social.
  11. Miranda, Jorge, 2013. "Estabilidad de la demanda de trabajo y efecto del salario minimo sobre el Empleo: El caso Chileno
    [Labor demand stability and the minimum wage effect on employment: the Chilean evidence]
    ," MPRA Paper 46637, University Library of Munich, Germany.
  12. Ketenci, Natalya, 2012. "The Feldstein–Horioka Puzzle and structural breaks: Evidence from EU members," Economic Modelling, Elsevier, vol. 29(2), pages 262-270.
  13. Dülger, Fikret & Lopcu, Kenan & Burgaç, Almıla & Ballı, Esra, 2013. "Is Russia suffering from Dutch Disease? Cointegration with structural break," Resources Policy, Elsevier, vol. 38(4), pages 605-612.
  14. Esteve, Vicente & Tamarit, Cecilio, 2012. "Is there an environmental Kuznets curve for Spain? Fresh evidence from old data," Economic Modelling, Elsevier, vol. 29(6), pages 2696-2703.
  15. Lopcu, Kenan & Dülger, Fikret & Burgaç, Almıla, 2013. "Relative productivity increases and the appreciation of the Turkish lira," Economic Modelling, Elsevier, vol. 35(C), pages 614-621.

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