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Saving-Investment Nexus and International Capital Mobility in India: Revisiting Feldstein-Horioka Hypothesis

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    (Reserve Bank of India)



    (Reserve Bank of India)

The paper employing ARDL cointegration approach examined the Feldstein-Horioka (FH)(1980) postulate on international capital mobility for India during 1950-51 to 1990-1991 and during 1950-51 to 2006-07. It finds a robust long-run cointegrating relationship between saving and investment rates in India with the former explaining the latter without any feedback, implying lower degree of international capital mobility. Conforming to the F-H hypothesis, the relationship between saving and investment rates was found to be weaker with the inclusion of post-reform period, characterized by a more liberalized regime on capital flows, than during the pre-reform period. In the short-run also the relationship between saving and investment rates was found to be strong, indicating the influence of temporary shocks emanating from business cycle. That the long-run equilibrium relationship between saving and investment rates could not be statistically distinguished from one imply a sustainable current account balance in India.

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Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

Volume (Year): 45 (2010)
Issue (Month): 1 ()
Pages: 49-66

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Handle: RePEc:dse:indecr:0014
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