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The Feldstein-Horioka Paradox: A New Perspective from the Institutional Sector Level

  • Ricardo Bebczuk

    (Central Bank of Argentina)

  • Klaus Schmidt-Hebbel

    (Central Bank of Chile)

Working on a sample of OECD countries spanning the period 1970-2003, this paper contributes to the literature on the Feldstein-Horioka puzzle by making three main innovations: First, we estimate, for the first time, regressions between investment and saving at the institutional sector level (households, corporations, and government). Second, we analyze in detail the implications of giving separate consideration to current account deficits and surpluses. Lastly, we use advanced panel data techniques to deal with endogeneity and to distinguish long- and short-run effects. After discarding the influence of common factors, the conclusions are that: (i) The national Feldstein-Horioka coefficient is in the vicinity of 0.5, but sectoral coefficients are much lower and even insignificantly different from zero; (ii) Such positive and significant national coefficient would not reflect frictions in international credit markets but just a fiscal current account targeting policy; (iii) Nevertheless, when the sample is split into deficit and surplus years, a higher and significant correlation emerges for the former at the national, household, and corporate level, implying that credit imperfections still play a role for the private but not for the public sector. Equally noteworthy, household correlation is still positive and significant, yet lower, for surplus years; and (iv) Against the background of a unitary long-run coefficient to satisfy the intertemporal budget constraint, we find a the long-run relationship of 0.75 for national data, 0.6 for corporations, and a weak or non-significant at family and government levels. Finally, we check this new evidence for developed countries with Argentina and Chile in the last decades, drawing relevant lessons for fiscal policy and external financial liberalization.

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File URL: http://www.bcra.gov.ar/pdfs/investigaciones/FeldsteinHorioka.pdf
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Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

Volume (Year): 1 (2007)
Issue (Month): 46 (January - March)
Pages: 103-136

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Handle: RePEc:bcr:ensayo:v:1:y:2007:i:46:p:103-136
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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. Jos Jansen, W, 1996. "Estimating saving-investment correlations: evidence for OECD countries based on an error correction model," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 749-781, October.
  3. Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.).
  4. Argimon, Isabel & Roldan, JoseMaria, 1994. "Saving, investment and international capital mobility in EC countries," European Economic Review, Elsevier, vol. 38(1), pages 59-67, January.
  5. Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank.
  6. Florian Pelgrin & Sebastian Schich, 2004. "National Saving-Investment Dynamics and International Capital Mobility," Working Papers 04-14, Bank of Canada.
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