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High-Income Countries and Feldstein-Horioka Puzzle: Econometric Evidence from Dynamic Common-Correlated Effects Model

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  • Onur ÖZDEMIR

    (Istanbul Gelisim University, Department of International Trade and Finance (English), Istanbul, Turkey.)

Abstract

This paper reexamines the magnitude of international capital mobility under the Feldstein-Horioka puzzle in the context of 29 high-income countries over the 1980-2019 period. The puzzle is also revisited by employing the Dynamic Common-Correlated Effects method to incorporate the issues of cross-sectional dependence and heterogeneity. Moreover, the study investigates the role of macroeconomic and social factors, such as labor share of income, welfare-relevant technological progress, financial development, government expenditure, and political globalization, to go further beyond the traditional findings in the existing literature. The empirical results are based on three main headings. First, the findings confirm the existence of the Feldstein-Horioka puzzle. In other words, there is a lack of international capital mobility among high-income countries. Second, by using the interaction terms for financial development, government expenditure, and political globalization with the savings ratio, the immobile characteristics of international capital can be reduced by further implications of a higher rate of government expenditure. Finally, the results show that having more unequal distribution of income among capital and labor intensifies the domestic investment-saving nexus for an aggregate economy since the financial assets become more shrinking away from flowing out of the host country

Suggested Citation

  • Onur ÖZDEMIR, 2022. "High-Income Countries and Feldstein-Horioka Puzzle: Econometric Evidence from Dynamic Common-Correlated Effects Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 45-67, April.
  • Handle: RePEc:rjr:romjef:v::y:2022:i:1:p:45-67
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    Keywords

    Feldstein-Horioka puzzle; international capital mobility; financial integration; panel cointegration; dynamic common correlated effects;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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