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A new look at the Feldstein-Horioka puzzle : an "European-regional" perspective

  • Jérôme Héricourt

    ()

    (TEAM - Théories et Applications en Microéconomie et Macroéconomie - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne)

  • Mathilde Maurel

    ()

    (ROSES - Réformes et Ouverture des Systèmes Economiques post-Socialistes - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

The purpose of this paper consists in assessing the extent of financial integration in the European Union using the Feldstein-Horioka criterion. More precisely, we test the cross-correlation of savings and investment rates across the regions of the European Union, using regional data from Regio and national statistical offices, over the period 1995-2000. Several important outcomes are reported by our article. First, we find that the financial integration seems to be realized inside each country, and we are able to rationalize the few puzzles we face. Second, we find that overall financial integration between EU regions is almost complete. After performing additional investigations on consistent sub-groups of regions, however, our analysis discards the illusion that the sole suppression of institutional barriers to capital mobility would be sufficient to achieve a perfect financial integration. In that spirit, our main finding is that History, language, borders and distance as a proxy for transaction and information costs, still matter.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00196383.

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Date of creation: Oct 2005
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Publication status: Published in Cahiers de la Maison des Sciences Economiques 2005.70 - ISSN : 1624-0340. 2005
Handle: RePEc:hal:cesptp:halshs-00196383
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00196383
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  1. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
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  7. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  8. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  9. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  10. Lawrence H. Summers, 1986. "Tax Policy and International Competitiveness," NBER Working Papers 2007, National Bureau of Economic Research, Inc.
  11. Barry Eichengreen., 1990. "Trends and Cycles in Foreign Lending," Economics Working Papers 90-146, University of California at Berkeley.
  12. Kim, Sunghyun Henry, 2001. "The saving-investment correlation puzzle is still a puzzle," Journal of International Money and Finance, Elsevier, vol. 20(7), pages 1017-1034, December.
  13. Martin Feldstein & Philippe Bacchetta, 1989. "National Saving and International Investment," NBER Working Papers 3164, National Bureau of Economic Research, Inc.
  14. Iwamoto, Yasushi & van Wincoop, Eric, 2000. "Do Borders Matter? Evidence from Japanese Regional Net Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 241-69, February.
  15. Maurice Obstfeld, 1985. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
  16. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
  17. Taylor, Alan M., 1998. "Argentina and the world capital market: saving, investment, and international capital mobility in the twentieth century," Journal of Development Economics, Elsevier, vol. 57(1), pages 147-184, October.
  18. Nakamura, Alice & Nakamura, Masao, 1981. "On the Relationships among Several Specification Error Tests Presented by Durbin, Wu, and Hausman," Econometrica, Econometric Society, vol. 49(6), pages 1583-88, November.
  19. Tobin, James, 1983. "'Domestic saving and international capital movements in the long run and the short run' by M. Feldstein," European Economic Review, Elsevier, vol. 21(1-2), pages 153-156.
  20. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
  21. Bayoumi, Tamim A. & Rose, Andrew K., 1993. "Domestic savings and intra-national capital flows," European Economic Review, Elsevier, vol. 37(6), pages 1197-1202, August.
  22. Anindya Banerjee & Paolo Zanghieri, 2003. "A New Look at the Feldstein-Horioka Puzzle using an Integrated Panel," Working Papers 2003-22, CEPII research center.
  23. Caporale, Guglielmo Maria & Panopoulou, Ekaterini & Pittis, Nikitas, 2005. "The Feldstein-Horioka puzzle revisited: A Monte Carlo study," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1143-1149, November.
  24. Jeffrey A. Frankel, 1985. "International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?," NBER Working Papers 1773, National Bureau of Economic Research, Inc.
  25. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, vol. 106(436), pages 620-27, May.
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