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Is the Feldstein-Horioka Puzzle Really a Puzzle?

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Author Info
Daniel Levy (Bar-Ilan & Emory)

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Abstract

Using the framework of a dynamic intertemporal optimization model of an open economy, it is shown that the long-run investment-saving correlation follows directly from the economy's dynamic budget constraint and this does not depend on the degree of international capital mobility. Therefore, unless the budget constraint is violated, the time series of investment and saving should be cointegrated, and this should be true for any degree of capital mobility. Using an improved econometric technique, which encompasses the tests used by previous authors and avoids some of the pitfalls associated with their tests, I show that their conflicting findings can be explained by a simple but important, omitted variables problem. Using annual and quarterly post-war U.S. data, I find that investment and saving are cointegrated in levels as well as in rates, regardless of the time period considered, as predicted by the model.

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Paper provided by EconWPA in its series International Finance with number 0402002.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 33 pages
Date of creation: 07 Feb 2004
Date of revision: 12 May 2005
Handle: RePEc:wpa:wuwpif:0402002

Note: Type of Document - pdf; prepared on Win 98; to print on Any printer; pages: 33 ; figures: Figures are included
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Related research
Keywords: Capital Mobility; Investment-Saving Correlation; Dynamic Budget Constraint; Integration; Cointegration; Omitted Variables in Cointegration; International Capital Mobility; Long-Term Capital Mobility; Feldstein-Horioka Puzzle; Investment-Saving Comovement; Investment-Saving Cointegration; Intertemporal Optimization;

Find related papers by JEL classification:
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Glenn Otto & Tony S. Wirjanto, 1989. "National Savings and Domestic Investment in the Long Run: Some Time Series Evidence for the U.S. and Canada," Working Papers 754, Queen's University, Department of Economics.
  2. Jeffrey A. Frankel, 1991. "Quantifying International Capital Mobility in the 1980s," NBER Working Papers 2856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2.
  4. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Levy, D., 1990. "Investment-Saving Comovement, Capital Mobility, And Fiscal Policy," Papers 90-91-04, California Irvine - School of Social Sciences.
  7. Daniel Levy, 2000. "Investment-Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 100-137, January. [Downloadable!] (restricted)
    Other versions:
  8. Gulley, O. David, 1992. "Are saving and investment cointegrated? : Another look at the data," Economics Letters, Elsevier, vol. 39(1), pages 55-58, May. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-36, June. [Downloadable!] (restricted)
    Other versions:
  11. Sachsida, Adolfo & Caetano, Marcelo Abi-Ramia, 2000. "The Feldstein-Horioka puzzle revisited," Economics Letters, Elsevier, vol. 68(1), pages 85-88, July. [Downloadable!] (restricted)
    Other versions:
  12. Daniel Levy, 1995. "Investment-saving comovement under endogenous fiscal policy," Open Economies Review, Springer, vol. 6(3), pages 237-254, July. [Downloadable!] (restricted)
    Other versions:
  13. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January. [Downloadable!] (restricted)
  14. Tsoukis, C. & Alyousha, A., 2000. "A Re-Examination of Saving - Investment Relationships: Cointegration, Causality and International Capital Mobility," Papers 271, Universite de Nantes - Economie Internationale et de l'Entreprise.
  15. Helen Popper, 1990. "International capital mobility: direct evidence from long-term currency swaps," International Finance Discussion Papers 386, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  16. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June. [Downloadable!] (restricted)
    Other versions:
  17. Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34. [Downloadable!] (restricted)
  18. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Daniel Levy, 1995. "Investment-saving comovement under endogenous fiscal policy," Open Economies Review, Springer, vol. 6(3), pages 237-254, July. [Downloadable!] (restricted)
    Other versions:
  2. Matthew Higgins & Daniel Levy & Andrew Young, 2005. "Growth and Convergence across the US: Evidence from County-Level Data," Macroeconomics 0505009, EconWPA. [Downloadable!]
    Other versions:
  3. João Sousa Andrade, 2006. "Mobilidade do Capital e Sustentabilidade Externa: uma aplicação da tese de F-H a Portugal (1910-2004)," GEMF Working Papers 2006-04, GEMF - Faculdade de Economia, Universidade de Coimbra. [Downloadable!]
  4. Daniel Levy, 2005. "Investment-Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series," International Finance 0505006, EconWPA, revised 16 May 2005. [Downloadable!]
    Other versions:
  5. Aleksander Aristovnik, 2005. "Twin Deficits Hypothesis And Horioka-Feldstein Puzzle In Transition Economies," International Finance 0510020, EconWPA. [Downloadable!]
  6. Young, Andrew & Higgins, Matthew & Levy, Daniel, 2006. "Heterogeneous Convergence," MPRA Paper 954, University Library of Munich, Germany. [Downloadable!]
    Other versions:
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