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

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  • Mariam Camarero

    (University Jaume I, University of Valencia, University of Valencia)

  • Alejandro Munoz
  • Cecilio Tamarit

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.

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  • Mariam Camarero & Alejandro Munoz & Cecilio Tamarit, 2021. "50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle," Working Papers 2021.04, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2021.04
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    Keywords

    Capital mobility; Feldstein-Horioka puzzle; Multiple Structural Breaks; Cointegration; unit roots;
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