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The Feldstein-Horioka Fact

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  • Domenico Giannone
  • Michèle Lenza

Abstract

This paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment rates observed in OECD countries. We find that once controlling for general equilibrium effects the saving-retention coefficient remains high in the 70’s but decreases considerably since the 80’s, consistently with the increased capital mobility in OECD countries.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number 2009_022.

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Length: 21 p.
Date of creation: 2009
Date of revision:
Publication status: Published by:
Handle: RePEc:eca:wpaper:2009_022

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Keywords: Saving-Investment correlation; capital mobility; international comovement; dynamic factor model.;

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References

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  1. Gregory, Allan W. & Head, Allen C., 1999. "Common and country-specific fluctuations in productivity, investment, and the current account," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 423-451, December.
  2. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  3. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  4. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
  5. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  6. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  8. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
  9. Charlotte Ostergaard & Bent E. Sorensen & Oved Yosha, 2000. "Consumption and aggregate constraints : evidence from U.S. states and Canadian provinces," Research Working Paper RWP 00-04, Federal Reserve Bank of Kansas City.
  10. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  11. 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.
  12. Barro, Robert J, 1992. " World Interest Rates and Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 323-42.
  13. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
  14. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  15. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  16. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
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Citations

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Cited by:
  1. Kumar, Saten & Sen, Rahul & Srivastava, Sadhana, 2014. "Does economic integration stimulate capital mobility? An analysis of four regional economic communities in Africa," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 33-50.
  2. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Trends and cycles in the euro area: how much heterogeneity and should we worry about it?," Working Paper Series 0595, European Central Bank.
  3. Andrea R. Lamorgese & Gianmarco I.P. Ottaviano, 2006. "Intercity interactions: evidence from the US," 2006 Meeting Papers 667, Society for Economic Dynamics.
  4. John C. Bluedorn, 2005. "Hurricanes: Intertemporal Trade and Capital Shocks," Economics Series Working Papers 241, University of Oxford, Department of Economics.
  5. Marlene Amstad & Andreas M. Fischer, 2005. "Shock identification of macroeconomic forecasts based on daily panels," Staff Reports 206, Federal Reserve Bank of New York.
  6. Costantini, Mauro & Gutierrez, Luciano, 2013. "Capital mobility and global factor shocks," Economics Letters, Elsevier, vol. 120(3), pages 513-515.
  7. Laura Jaramillo & Anke Weber, 2013. "Global Spillovers into Domestic Bond Markets in Emerging Market Economies," IMF Working Papers 13/264, International Monetary Fund.
  8. Pavel Trunin & Andrey Zubarev, 2013. "The Feldstein-Horioka Puzzle: Modern Aspects," Working Papers 0070, Gaidar Institute for Economic Policy, revised 2013.
  9. Salvatore Dell'Erba & Sergio Sola, 2013. "Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel," IMF Working Papers 13/159, International Monetary Fund.
  10. Rao, B. Bhaskara & Tamazian, Artur & Kumar, Saten, 2010. "Systems GMM estimates of the Feldstein-Horioka puzzle for the OECD countries and tests for structural breaks," Economic Modelling, Elsevier, vol. 27(5), pages 1269-1273, September.
  11. Cimadomo, Jacopo & Bénassy-Quéré, Agnès, 2012. "Changing patterns of fiscal policy multipliers in Germany, the UK and the US," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 845-873.
  12. Saten Kumar & B. Bhaskara Rao, 2011. "A Time‐series Approach to the Feldstein–Horioka Puzzle with Panel Data from the OECD Countries," The World Economy, Wiley Blackwell, vol. 34(3), pages 473-485, 03.
  13. Anastasios Mastroyiannis, 2007. "Current Account Dynamics and the Feldstein and Horioka Puzzle: the Case of Greece," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 4(1), pages 91-99, June.
  14. Ambaye, G. G. & Berhanu, T. & Abera, G., 2013. "Modeling the Determinats of Domestic Private Investments in Ethiopia," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 5(4), December.
  15. Iñaki Erauskin-Iurrita, 2009. "The current account and the new rule in a not-so-small open economy," Investigaciones Economicas, Fundación SEPI, vol. 33(3), pages 529-557, September.
  16. Kalemli-Ozcan, Sebnem & Sorensen, Bent E & Yosha, Oved, 2004. "Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe," CEPR Discussion Papers 4463, C.E.P.R. Discussion Papers.
  17. Salvatore Dell'Erba & Sergio Sola, 2013. "Fiscal Policy, Interest Rates and Risk Premia in Open Economy," IHEID Working Papers 05-2013, Economics Section, The Graduate Institute of International Studies.

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