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50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle

Author

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  • Mariam Camarero

    (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain))

  • Alejandro Muñoz

    (University of València, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain) de Marcenado, 27, 28015, Madrid (Spain))

  • Cecilio Tamarit

    (University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain))

Abstract

This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Specifically, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so clear in the peripheral, where the financial and sovereign crises have had a more substantial impact. Our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some caveats that remain unsolved.

Suggested Citation

  • Mariam Camarero & Alejandro Muñoz & Cecilio Tamarit, 2021. "50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle," Working Papers 2102, Department of Applied Economics II, Universidad de Valencia.
  • Handle: RePEc:eec:wpaper:2102
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    More about this item

    Keywords

    Capital mobility; Feldstein-Horioka puzzle; Multiple Structural Breaks; Cointegration; unit roots;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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