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

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  • Kejriwal Mohitosh

    () (Purdue University)

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.

Suggested Citation

  • Kejriwal Mohitosh, 2008. "Cointegration with Structural Breaks: An Application to the Feldstein-Horioka Puzzle," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(1), pages 1-39, March.
  • Handle: RePEc:bpj:sndecm:v:12:y:2008:i:1:n:3
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    Cited by:

    1. 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.
    2. Emilio Congregado & Vicente Esteve & Antonio A. Golpe, 2013. "From complements to substitutes: Structural breaks in the elasticity of substitution between paid-employment and self-employment in the US," Working Papers 1319, Department of Applied Economics II, Universidad de Valencia.
    3. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of US stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 04/13, Instituto Universitario de Análisis Económico y Social.
    4. Miranda Pinto, 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 60333, University Library of Munich, Germany, revised 30 Nov 2014.
    5. Esteve, Vicente & Navarro-Ibáñez, Manuel & Prats, María A., 2013. "The Spanish term structure of interest rates revisited: Cointegration with multiple structural breaks, 1974–2010," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 24-34.
    6. Alexander Karmann & Alexander Ludwig, 2014. "A two-step approach to examine the dynamics of market convergence," Applied Economics Letters, Taylor & Francis Journals, vol. 21(4), pages 284-288, March.
    7. 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.
    8. Liddle, Brantley & Messinis, George, 2015. "Revisiting sulfur Kuznets curves with endogenous breaks modeling: Substantial evidence of inverted-Us/Vs for individual OECD countries," Economic Modelling, Elsevier, vol. 49(C), pages 278-285.
    9. 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.
    10. repec:eee:ecosys:v:41:y:2017:i:1:p:139-150 is not listed on IDEAS
    11. 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.
    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. Natalya Ketenci, N., 2010. "The Feldstein Horioka Puzzle by groups of OECD members: the panel approach," MPRA Paper 25848, University Library of Munich, Germany.
    14. Di Iorio, Francesca & Fachin, Stefano, 2007. "Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 1, pages 1-23.
    15. Brantley Liddle & George Messinis, 2018. "Revisiting carbon Kuznets curves with endogenous breaks modeling: evidence of decoupling and saturation (but few inverted-Us) for individual OECD countries," Empirical Economics, Springer, vol. 54(2), pages 783-798, March.
    16. Alexander Ludwig, 2014. "Credit risk-free sovereign bonds under Solvency II: a cointegration analysis with consistently estimated structural breaks," Applied Financial Economics, Taylor & Francis Journals, vol. 24(12), pages 811-823, June.
    17. 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.
    18. 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.
    19. 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.
    20. 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.
    21. Ekrem ERDEM & Ahmet KOSEOGLU & Ali Gokhan YUCEL, 2016. "Testing the validity of the Feldstein-Horioka Puzzle: New evidence from structural breaks for Turkey," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(607), S), pages 17-26, Summer.
    22. 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.
    23. 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.
    24. 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.
    25. Chen, Shyh-Wei & Shen, Chung-Hua, 2015. "Revisiting the Feldstein–Horioka puzzle with regime switching: New evidence from European countries," Economic Modelling, Elsevier, vol. 49(C), pages 260-269.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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