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The Feldstein-Horioka Test of International Capital Mobility; Is it Feasible?

Listed author(s):
  • W. J. Jansen

Feldstein and Horioka (1980) argued that the correlation of saving and investment in a cross-section of countries may provide a test of global capital mobility. This paper argues that neither the long-run nor the short-run correlation can serve as a reliable basis for such a test. The intertemporal budget constraint implies that each country’s saving and investment should be cointegrated over time. Simulations show that the cross-section regressions used in the literature will produce correlations that strongly tend towards one, regardless of the degree of capital mobility. Although the short-run correlation is not affected by the intertemporal budget constraint, the empirical analysis shows it is primarily a country-specific business cycle fact.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 96/100.

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Length: 30
Date of creation: 01 Sep 1996
Handle: RePEc:imf:imfwpa:96/100
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