Capital mobility in the panel GMM framework: Evidence from EU members

This paper examines the level of international capital mobility in European Union members under the Feldstein and Horioka (1980) hypothesis. The validity of the Feldstein-Horioka puzzle is investigated taking into account the impact of the global financial crisis employing the generalized method of moments (GMM) estimation technique developed by Hansen (1982). In general, the world countries with time have a tendency to a higher level of capital market openness. According to Feldstein and Horioka (1980), a higher saving-investment correlation is related to lower capital mobility. In this paper, panel data for 27 European countries were used for the period of 1995-2013 on the quarterly basis. The empirical results provide evidence of high capital mobility in EU members, obtaining a low value of a saving retention coefficient. The results of estimations indicate significant dependence of investments on its past values. It is found that the global financial crisis had a deeply negative impact on investment rates in 2007 and for the general period of 2007-2013. The empirical results indicate that the level of capital mobility increased during the global financial crisis, 2007-2013. Thus decrease in investments and increase in the international capital mobility level of European countries during the period of the global financial crisis of 2007-2013, taking into account high risk in the international market, indicates a reallocation of capital from international to regional markets.