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The Feldstein-Horioka puzzle and a new measure of international capital mobility

  • Hoffmann, M.

In intertemporal optimization models of current account dynamics, the budget constraint will induce high degrees of positive comovement in the levels of savings and investment and the two variables are likely to be cointegrated. Error correction will then also influence the correlations of the cyclical components which will therefore be uninformative about capital mobility. As an alternative we suggest a new measure of long-run capital mobility based on Johansen's (1988) procedure. We apply our method to historical British and US data and find surprisingly high levels of long-run capital mobility throughout the century.

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9916.

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Date of creation: 01 Jan 1999
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Handle: RePEc:stn:sotoec:9916
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  1. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-36, June.
  2. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  3. Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
  4. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
  5. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
  6. Eichengreen, Barry, 1990. "Trends and Cycles in Foreign Lending," Department of Economics, Working Paper Series qt82z7083m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Obstfeld, Maurice & Rogoff, Kenneth, 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers 233395, University of California-Berkeley, Department of Economics.
  8. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  9. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  10. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  11. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc.
  12. Lee, Kevin C & Pesaran, M Hashem & Pierse, Richard G, 1992. "Persistence of Shocks and Their," Economic Journal, Royal Economic Society, vol. 102(411), pages 342-56, March.
  13. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  14. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
  15. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  16. 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.
  17. Proietti, Tommaso, 1997. "Short-Run Dynamics in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(3), pages 405-22, August.
  18. Ramon Moreno, 1994. "Saving-investment dynamics and capital mobility in the U.S. and Japan," Pacific Basin Working Paper Series 94-05, Federal Reserve Bank of San Francisco.
  19. Alan M. Taylor, 1994. "Domestic Saving and International Capital Flows Reconsidered," NBER Working Papers 4892, National Bureau of Economic Research, Inc.
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