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An Assessment Of The Feldstein–Horioka Puzzle For India: A Markov Regime Switching Approach

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  • ARCHANA KULKARNI

    (Patna 801106, Bihar, India)

  • RAJENDRA N. PARAMANIK

    (Faculty of Economics and Finance, Department of HSS, IIT Patna, Patna 801106, Bihar, India)

Abstract

The study aims to examine the Feldstein–Horioka puzzle in the Indian context during 2002Q2 to 2019Q4 to unearth nonlinear patterns in the data. Findings from an augmented Markov regime-switching model reveal two distinct, yet random regimes for correlations between savings and investment-GDP ratios, with higher correlation between the variables persisting for a longer duration. In the low correlation regime, trade-related factors, policy uncertainty and global shocks have a significant impact on the correlation. Fiscal shocks and trade costs explain high correlations in regime 2, while global shocks act to decrease the correlation in this regime. The high correlation regime dominates the study period and indicates that the Feldstein–Horioka puzzle of limited capital mobility persists in India. Economic agents appear to respond rapidly to changing domestic and global policy conditions, besides being affected by incomplete integration of goods markets, explaining the pattern of correlations.

Suggested Citation

  • Archana Kulkarni & Rajendra N. Paramanik, 2025. "An Assessment Of The Feldstein–Horioka Puzzle For India: A Markov Regime Switching Approach," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 70(06), pages 1625-1644, September.
    • Handle: RePEc:wsi:serxxx:v:70:y:2025:i:06:n:s0217590824500073
    DOI: 10.1142/S0217590824500073
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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