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The Feldstein-Horioka Fact

  • Giannone, Domenico
  • Lenza, Michele

This Paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment observed in OECD countries. We introduce a novel factor augmented panel regression to control for general equilibrium effects where global shocks are allowed to affect each country with specific magnitude and lag structure. We show that the homogeneity restriction on the propagation of global shocks across countries is rejected by the data and biases the saving-retention coefficient estimated in previous studies. By relaxing this assumption, the saving-retention coefficient remains high in the 70s but decreases considerably over time becoming very small in the last two decades. This finding is explained by the increased capital mobility in OECD countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4610.

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Date of creation: Sep 2004
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Handle: RePEc:cpr:ceprdp:4610
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  1. Barro, Robert J, 1992. " World Interest Rates and Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 323-42.
  2. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  3. 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 169-88, April.
  4. Reuven Glick & Kenneth S. Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.).
  5. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  6. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  7. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  8. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
  9. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
  10. Allan W. Gregory & Allen C. Head, 1996. "Common and Country-specific Fluctuations in Productivity, Investment, and the Current Account," Working Papers 931, Queen's University, Department of Economics.
  11. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  12. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  13. Charlotte Ostergaard & Bent E. Serensen & Oved Yosha, 2002. "Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 634-645, June.
  14. Ventura, Jaume, 2002. "Towards a Theory of Current Accounts," CEPR Discussion Papers 3545, C.E.P.R. Discussion Papers.
  15. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  16. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  17. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
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