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Current Account Solvency and the Feldstein-Horioka Puzzle

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  • Coakley, Jerry
  • Kulasi, Farida
  • Smith, Ron

Abstract

In this paper, the authors suggest an alternative explanation of the high cross-section association between shares of saving and investment in GDP which M. Feldstein and C. Horioka (1980) interpret as evidence of low capital mobility. In OECD countries, saving and investment shares appear to be integrated of order one. The authors show that a solvency constraint implies that the current balance is stationary and, thus, that saving and investment cointegrate with a unit coefficient irrespective of the degree of capital mobility. It is this long-run relation that the Feldstein-Horioka cross-section regression captures. Econometric results for twenty-three OECD countries over the 1960-92 period are consistent with this explanation. Copyright 1996 by Royal Economic Society.

Suggested Citation

  • Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, vol. 106(436), pages 620-627, May.
    • Handle: RePEc:ecj:econjl:v:106:y:1996:i:436:p:620-27
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