IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v36y2015icp1-17.html
   My bibliography  Save this article

Regional integration, capital mobility and financial intermediation revisited: Application of general to specific method in panel data

Author

Listed:
  • Kumar, Saten

Abstract

We utilize the Feldstein–Horioka puzzle to investigate the impact of regional integration agreements (AFTA, EU, EFTA, CARTAGENA, MERCOSUR and NAFTA) on the international capital mobility. In doing so, we employed a novel empirical technique i.e. the general to specific (GETS) method of Hendry (1995) to estimate the cointegrating equation and dynamic adjustments in panel data. Using the classical fixed and random effects estimators, we estimate the long- and short-run effects in the same model and we show that it is possible to estimate the lagged adjustment process. The procedure used is general enough to allow for the presence of endogeneity, heteroscedasticity, serial correlation and cross-sectional dependence in the residuals. Our findings show that the estimate of saving retention has declined and the speed of adjustment has increased in the post-integration period, implying that the international mobility of capital has increased in these countries. Moreover, our findings reveal that regional integrations stimulate financial intermediation, which in turn, improves real productivity.

Suggested Citation

  • Kumar, Saten, 2015. "Regional integration, capital mobility and financial intermediation revisited: Application of general to specific method in panel data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 1-17.
  • Handle: RePEc:eee:intfin:v:36:y:2015:i:c:p:1-17
    DOI: 10.1016/j.intfin.2015.02.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443115000256
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Coakley, Jerry & Kulasi, Farida, 1997. "Cointegration of long span saving and investment," Economics Letters, Elsevier, vol. 54(1), pages 1-6, January.
    2. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    3. Tesar, Linda L., 1991. "Savings, investment and international capital flows," Journal of International Economics, Elsevier, vol. 31(1-2), pages 55-78, August.
    4. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    5. Martin Feldstein, 1991. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353, National Bureau of Economic Research, Inc.
    6. Joakim Westerlund, 2006. "Testing for Panel Cointegration with Multiple Structural Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(1), pages 101-132, February.
    7. Saten Kumar & B. Bhaskara Rao, 2011. "A Time‐series Approach to the Feldstein–Horioka Puzzle with Panel Data from the OECD Countries," The World Economy, Wiley Blackwell, vol. 34(3), pages 473-485, March.
    8. 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.
    9. Hussein, Khaled A., 1998. "International capital mobility in OECD countries: The Feldstein-Horioka 'puzzle' revisited," Economics Letters, Elsevier, vol. 59(2), pages 237-242, May.
    10. Fouquau, Julien & Hurlin, Christophe & Rabaud, Isabelle, 2008. "The Feldstein-Horioka puzzle: A panel smooth transition regression approach," Economic Modelling, Elsevier, vol. 25(2), pages 284-299, March.
    11. 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.
    12. B. Bhaskara Rao, 2007. "Estimating short and long-run relationships: a guide for the applied economist," Applied Economics, Taylor & Francis Journals, vol. 39(13), pages 1613-1625.
    13. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-436, June.
    14. Fouquau, Julien & Hurlin, Christophe & Rabaud, Isabelle, 2008. "The Feldstein-Horioka puzzle: A panel smooth transition regression approach," Economic Modelling, Elsevier, vol. 25(2), pages 284-299, March.
    15. Golub, Stephen S., 1990. "International capital mobility: net versus gross stocks and flows," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 424-439, December.
    16. Fouquau, Julien & Hurlin, Christophe & Rabaud, Isabelle, 2008. "The Feldstein-Horioka puzzle: A panel smooth transition regression approach," Economic Modelling, Elsevier, vol. 25(2), pages 284-299, March.
    17. Deidda, Luca & Fattouh, Bassam, 2008. "Banks, financial markets and growth," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 6-36, January.
    18. Genberg, Hans & Swoboda, Alexander K, 1992. " Saving, Investment and the Current Account," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 347-366.
    19. Baltagi, Badi H. & Li, Qi, 1991. "A joint test for serial correlation and random individual effects," Statistics & Probability Letters, Elsevier, vol. 11(3), pages 277-280, March.
    20. Kendall, Jake, 2012. "Local financial development and growth," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1548-1562.
    21. Hasan, Iftekhar & Wachtel, Paul & Zhou, Mingming, 2009. "Institutional development, financial deepening and economic growth: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 157-170, January.
    22. Hoffmann, Mathias, 2004. "International capital mobility in the long run and the short run: can we still learn from saving-investment data?," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 113-131, February.
    23. Bordo, Michael D. & Rousseau, Peter L., 2012. "Historical evidence on the finance-trade-growth nexus," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1236-1243.
    24. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    25. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    26. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    27. Coakley, Jerry & Hasan, Farida & Smith, Ron, 1999. "Saving, Investment, and Capital Mobility in LDCs," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 632-640, November.
    28. Florian Pelgrin & Sebastian Schich, 2004. "National Saving-Investment Dynamics and International Capital Mobility," Staff Working Papers 04-14, Bank of Canada.
    29. Rao, B. Bhaskara & Tamazian, Artur & Kumar, Saten, 2010. "Systems GMM estimates of the Feldstein-Horioka puzzle for the OECD countries and tests for structural breaks," Economic Modelling, Elsevier, vol. 27(5), pages 1269-1273, September.
    30. Dimitris Christopoulos, 2007. "A reassessment of the Feldstein-Horioka hypothesis of perfect capital mobility: evidence from historical data," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(3), pages 273-280, July.
    31. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    32. 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.
    33. Dumitrescu, Elena-Ivona & Hurlin, Christophe, 2012. "Testing for Granger non-causality in heterogeneous panels," Economic Modelling, Elsevier, vol. 29(4), pages 1450-1460.
    34. Tadesse, Solomon, 2002. "Financial Architecture and Economic Performance: International Evidence," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 429-454, October.
    35. Corbin, Annie, 2001. "Country specific effect in the Feldstein-Horioka paradox: a panel data analysis," Economics Letters, Elsevier, vol. 72(3), pages 297-302, September.
    36. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
    37. Kim, Hongkee & Oh, Keun-Yeob & Jeong, Chan-Woo, 2005. "Panel cointegration results on international capital mobility in Asian economies," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 71-82, February.
    38. Krol, Robert, 1996. "International capital mobility: evidence from panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 467-474, June.
    39. Coiteux, Martin & Olivier, Simon, 2000. "The saving retention coefficient in the long run and in the short run: evidence from panel data," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 535-548, August.
    40. Chakrabarti, Avik, 2006. "The saving-investment relationship revisited: New evidence from multivariate heterogeneous panel cointegration analyses," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 402-419, June.
    41. Martin Schmidt, 2003. "Savings and investment in Australia," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 99-106.
    42. Saten Kumar & Don J. Webber & Scott Fargher, 2012. "Testing the validity of the Feldstein--Horioka puzzle for Australia," Applied Economics, Taylor & Francis Journals, vol. 44(5), pages 599-605, February.
    43. Saten Kumar, 2014. "Money demand income elasticity in advanced and developing countries: new evidence from meta-analysis," Applied Economics, Taylor & Francis Journals, vol. 46(16), pages 1873-1882, June.
    44. Fouquau, Julien & Hurlin, Christophe & Rabaud, Isabelle, 2008. "The Feldstein-Horioka puzzle: A panel smooth transition regression approach," Economic Modelling, Elsevier, vol. 25(2), pages 284-299, March.
    45. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long-run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
    46. 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 107-128, January.
    47. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
    48. Joseph P. Byrne & Giorgio Fazio & Norbert Fiess, 2009. "The Global Side of the Investment-Saving Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 1033-1040, August.
    49. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 327-342, December.
    50. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1998. "The Feldstein-Horioka Puzzle and Capital Mobility: A Review," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(2), pages 169-188, April.
    51. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    52. Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34.
    53. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    54. Baltagi, Badi H. & Li, Qi, 1995. "Testing AR(1) against MA(1) disturbances in an error component model," Journal of Econometrics, Elsevier, vol. 68(1), pages 133-151, July.
    55. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
    56. Fouquau, Julien & Hurlin, Christophe & Rabaud, Isabelle, 2008. "The Feldstein-Horioka puzzle: A panel smooth transition regression approach," Economic Modelling, Elsevier, vol. 25(2), pages 284-299, March.
    57. Bahmani-Oskooee, Mohsen & Chakrabarti, Avik, 2005. "Openness, size, and the saving-investment relationship," Economic Systems, Elsevier, vol. 29(3), pages 283-293, September.
    58. B. Bhaskara Rao & Saten Kumar, 2011. "Is the US demand for money unstable?," Applied Financial Economics, Taylor & Francis Journals, vol. 21(17), pages 1263-1272.
    59. Ron Smith & Ana-Maria Fuertes & Jerry Coakley, 2001. "Small Sample Properties of Panel Time-series Estimators with I(1) Errors," Working Papers wp01-08, Warwick Business School, Finance Group.
    60. Keun-Yeob Oh & Bong-Han Kim & Hong-Kee Kim & Byung-Chul Ahn, 1999. "Savings-investment cointegration in panel data," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 477-480.
    61. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    62. B. Bhaskara Rao & Gazi Hassan, 2011. "Determinants of the long-run growth rate of Bangladesh," Applied Economics Letters, Taylor & Francis Journals, vol. 18(7), pages 655-658.
    63. Fouquau, Julien & Hurlin, Christophe & Rabaud, Isabelle, 2008. "The Feldstein-Horioka puzzle: A panel smooth transition regression approach," Economic Modelling, Elsevier, vol. 25(2), pages 284-299, March.
    64. Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, vol. 102(414), pages 1162-1170, September.
    65. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    66. Tsung-wu Ho & Ru-Lin Chiu, 2001. "Country Size and Investment-Saving Correlation: A Panel Threshold Error Correction Model," Eastern Economic Journal, Eastern Economic Association, vol. 27(4), pages 481-490, Fall.
    67. W. Jansen, 1998. "Interpreting Saving-Investment Correlations," Open Economies Review, Springer, vol. 9(3), pages 207-219, July.
    68. Kim, Sunghyun Henry, 2001. "The saving-investment correlation puzzle is still a puzzle," Journal of International Money and Finance, Elsevier, vol. 20(7), pages 1017-1034, December.
    69. Helmut Herwartz & Fang Xu, 2009. "Panel data model comparison for empirical saving-investment relations," Applied Economics Letters, Taylor & Francis Journals, vol. 16(8), pages 803-807.
    70. Uctum, Merih & Wickens, Michael R., 1990. "National Insolvency: A Test of the US Intertemporal Budget Constraint," CEPR Discussion Papers 437, C.E.P.R. Discussion Papers.
    71. 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.
    72. Tommaso Mancini-Griffoli & Laurent L. Pauwels, 2006. "Is There a Euro Effect on Trade? An Application of End-of-Sample Structural Break Tests for Panel Data," IHEID Working Papers 04-2006, Economics Section, The Graduate Institute of International Studies, revised Apr 2006.
    73. Jerry Coakley & Ana-Maria Fuertes & Fabio Spagnolo, 2004. "Is the Feldstein-Horioka Puzzle History?," Manchester School, University of Manchester, vol. 72(5), pages 569-590, September.
    74. Isabelle Cadoret, 2001. "The saving investment relation: a panel data approach," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 517-520.
    75. Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LP, vol. 7(3), pages 281-312, September.
    76. Westerlund, Joakim, 2006. "Testing for panel cointegration with a level break," Economics Letters, Elsevier, vol. 91(1), pages 27-33, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:mup:actaun:actaun_2016064061843 is not listed on IDEAS
    2. repec:spd:journl:v:68:y:2018:i:4:p:51-71 is not listed on IDEAS

    More about this item

    Keywords

    Regional economic integration; Feldstein–Horioka puzzle; General to specific; International capital mobility; Financial intermediation; Productivity;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:36:y:2015:i:c:p:1-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/intfin .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.