A new look at the Feldstein-Horioka puzzle : an "European-Regional" perspective

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A new look at the Feldstein-Horioka puzzle : an "European-Regional" perspective

Author Info

Jérôme Héricourt () (TEAM)
Mathilde Maurel () (ROSES)

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Abstract

The purpose of this paper consists in assessing the extent of financial integration in the European Union using the Feldstein-Horioka criterion. More precisely, we test the cross-correlation of savings and investment rates across the regions of the European Union, using regional data from Regio and national statistical offices, over the period 1995-2000. Several important outcomes are reported by our article. First, we find that the financial integration seems to be realized inside each country, and we are able to rationalize the few puzzles we face. Second, we find that overall financial integration between EU regions is almost complete. After performing additional investigations on consistent sub-groups of regions, however, our analysis discards the illusion that the sole suppression of institutional barriers to capital mobility would be sufficient to achieve a perfect financial integration. In that spirit, our main finding is that History, language, borders and distance as a proxy for transaction and information costs, still matter.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number j05070.

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Length: 31 pages
Date of creation: Oct 2005
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Handle: RePEc:mse:wpsorb:j05070

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; 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

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-11-12 (All new papers)
NEP-EEC-2005-11-12 (European Economics)
NEP-FIN-2005-11-12 (Finance)
NEP-GEO-2005-11-12 (Economic Geography)
NEP-MAC-2005-11-12 (Macroeconomics)

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