IDEAS home Printed from https://ideas.repec.org/p/ucd/wpaper/201518.html
   My bibliography  Save this paper

Capital controls, financial crisis and the investment saving nexus:Evidence from Iceland

Author

Listed:
  • Hamid Raza

    (School of Economics, University of Limerick)

  • Gylfi Zoega

    (Department of Economics, University of Iceland, Reykjavik and Department of Economics, Birkbeck College)

  • Stephen Kinsella

    (School of Economics, University of Limerick)

Abstract

We investigate the Feldstein and Horioka (1980) hypothesis for Iceland. First, we analyse the saving-investment (S-I) correlation for the period of restricted capital mobility between 1960 and 1994. We then add a period of free capital mobility between 1994 and 2008 and estimate the correlation for the period 1960-2008. Finally, we extend our analysis to the 2008 to 2014 period, when capital controls were imposed in response to the financial crisis. Finding cointegration between savings and investment for all the three regimes, the evidence shows that the S-I correlation is stronger during the period of capital controls that prevailed in 1960-1994 and becomes weaker when the capital mobility regime is included. However, the correlation weakens further when the post-crisis regime of capital controls is included, which implies that savings and investment are not related during the recent period of crisis and capital controls. The implications of our findings for post-crisis policy making are discussed.

Suggested Citation

  • Hamid Raza & Gylfi Zoega & Stephen Kinsella, 2015. "Capital controls, financial crisis and the investment saving nexus:Evidence from Iceland," Working Papers 201518, Geary Institute, University College Dublin.
    • Handle: RePEc:ucd:wpaper:201518
    as

    Download full text from publisher

    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201518.pdf
    File Function: First version, 2015
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. De Vita, Glauco & Abbott, Andrew, 2002. "Are saving and investment cointegrated? An ARDL bounds testing approach," Economics Letters, Elsevier, vol. 77(2), pages 293-299, October.
    2. Saten Kumar & B. Bhaskara Rao, 2011. "A Time‐series Approach to the Feldstein–Horioka Puzzle with Panel Data from the OECD Countries," The World Economy, Wiley Blackwell, vol. 34(3), pages 473-485, March.
    3. Lawrence H. Summers, 1988. "Tax Policy and International Competitiveness," NBER Chapters, in: International Aspects of Fiscal Policies, pages 349-386, National Bureau of Economic Research, Inc.
    4. Zoega Gylfi, 2010. "The Financial Crisis: Joblessness and Investmentlessness," Capitalism and Society, De Gruyter, vol. 5(2), pages 1-28, October.
    5. Kollias, Christos & Mylonidis, Nikolaos & Paleologou, Suzanna-Maria, 2008. "The Feldstein-Horioka puzzle across EU members: Evidence from the ARDL bounds approach and panel data," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 380-387.
    6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    7. Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34.
    8. Andrés Fernández & Michael W Klein & Alessandro Rebucci & Martin Schindler & Martín Uribe, 2016. "Capital Control Measures: A New Dataset," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 548-574, August.
    9. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    10. Keun-Yeob Oh & Bong-Han Kim & Hong-Kee Kim & Byung-Chul Ahn, 1999. "Savings-investment cointegration in panel data," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 477-480.
    11. Gudrun Johnsen, 2014. "Bringing Down the Banking System," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-34735-0.
    12. Sigridur Benediktsdottir & Jon Danielsson & Gylfi Zoega, 2011. "Lessons from a collapse of a financial system [Looting: The economic underworld of bankruptcy for profit]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 26(66), pages 183-235.
    13. Yan Bai & Jing Zhang, 2010. "Solving the Feldstein-Horioka Puzzle With Financial Frictions," Econometrica, Econometric Society, vol. 78(2), pages 603-632, March.
    14. Andrés Fernández & Michael W Klein & Alessandro Rebucci & Martin Schindler & Martín Uribe, 2016. "Capital Control Measures: A New Dataset," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 548-574, August.
    15. Robert Z. Aliber, 2011. "Monetary Turbulence and the Icelandic Economy," Palgrave Macmillan Books, in: Robert Z. Aliber & Gylfi Zoega (ed.), Preludes to the Icelandic Financial Crisis, chapter 15, pages 302-326, Palgrave Macmillan.
    16. Shrestha, M.B. & Chowdhury, K., 2005. "A Sequential Procedure for Testing Unit Roots in the Presence of Structural Break in Time Series Data: An Application to Quarterly Data of Nepal, 1970-2003," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(2), pages 31-46.
    17. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    18. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, vol. 106(436), pages 620-627, May.
    19. Guillermo A. Calvo, 1998. "CAPITAL FLOWS AND CAPITAL-MARKET CRISES: The Simple Economics of Sudden Stops," Journal of Applied Economics, Taylor & Francis Journals, vol. 1(1), pages 35-54, November.
    20. Oscar Bajo-Rubio, 1998. "The saving-investment correlation revisited: the case of Spain, 1964-1994," Applied Economics Letters, Taylor & Francis Journals, vol. 5(12), pages 769-772.
    21. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    22. Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
    23. Shrestha, Min B. & Chowdhury, Khorshed, 2005. "Sequential Procedure for Testing Unit Roots in the Presence of Structural Break in Time Series Data," Economics Working Papers wp05-06, School of Economics, University of Wollongong, NSW, Australia.
    24. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
    25. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Margarita Katsimi & Gylfi Zoega, 2016. "European Integration and the Feldstein–Horioka Puzzle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(6), pages 834-852, December.
    2. Ma, Wei & Li, Haiqi, 2016. "Time-varying saving–investment relationship and the Feldstein–Horioka puzzle," Economic Modelling, Elsevier, vol. 53(C), pages 166-178.
    3. Ketenci, Natalya, 2012. "The Feldstein–Horioka Puzzle and structural breaks: Evidence from EU members," Economic Modelling, Elsevier, vol. 29(2), pages 262-270.
    4. Dilem Yıldırım & Ethem Erdem Orman, 2016. "The Feldstein-Horioka Puzzle in the Presence of Structural Breaks: Evidence from China," ERC Working Papers 1601, ERC - Economic Research Center, Middle East Technical University, revised Jan 2016.
    5. Chen, Shyh-Wei & Shen, Chung-Hua, 2015. "Revisiting the Feldstein–Horioka puzzle with regime switching: New evidence from European countries," Economic Modelling, Elsevier, vol. 49(C), pages 260-269.
    6. Hamid Raza & Bjorn Gudmundsson & Gylfi Zoega & Stephen Kinsella, 2016. "Two thorns of experience: financialisation in Iceland and Ireland," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(6), pages 771-789, November.
    7. Mariam Camarero & Juan Sapena & Cecilio Tamarit, 2018. "FH Puzzle in the Eurozone: A time-varying analysis Preliminary Draft," Working Papers 1813, Department of Applied Economics II, Universidad de Valencia.
    8. Abu N.M. Wahid & Mohammad Salahuddin & Abdullah M. Noman, 2010. "Savings and investment in South Asia," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 37(6), pages 658-666, November.
    9. Loesse Esso, 2012. "Re-examining the saving-investment nexus: threshold cointegration and causality evidence from the ECOWAS," Economic Change and Restructuring, Springer, vol. 45(3), pages 193-220, August.
    10. Ahmed Raza ul MUSTAFA* & Mohammad NISHAT**, 2017. "ROLE OF SOCIAL PROTECTION IN POVERTY REDUCTION IN PAKISTAN: A Quantitative Approach," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(1), pages 67-88.
    11. Mariam Camarero & Alejandro Muñoz & Cecilio Tamarit, 2021. "50 Years of Capital Mobility in the Eurozone: Breaking the Feldstein-Horioka Puzzle," Open Economies Review, Springer, vol. 32(5), pages 867-905, November.
    12. Ali, Amjad & Ur Rehman, Hafeez, 2015. "Macroeconomic Instability and Its Impact on Gross Domestic Product: An Empirical Analysis of Pakistan," MPRA Paper 71037, University Library of Munich, Germany.
    13. Khorshed Chowdhury, 2011. "Dynamics, Structural Breaks and the Determinants of the Real Exchange Rate of Australia," Economics Working Papers wp11-11, School of Economics, University of Wollongong, NSW, Australia.
    14. Ketenci, Natalya, 2015. "Capital mobility in Russia," Russian Journal of Economics, Elsevier, vol. 1(4), pages 386-403.
    15. Phiri, Andrew, 2019. "The Feldstein-Horioka Puzzle and the Global Financial Crisis: Evidence from South Africa using Asymmetric Cointegration Analysis," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 72(2), pages 139-170.
    16. Chor Foon Tang & Hooi Hooi Lean, 2011. "Revisit Feldstein-Horioka puzzle: evidence from Malaysia," Economics Bulletin, AccessEcon, vol. 31(3), pages 2237-2249.
    17. Muhammad Ahad, 2016. "Nexus between Income Inequality, Crime, Inflation and Poverty: NewEvidence fromStructural Breaksfor Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 4(3), pages 133-145, March.
    18. Ali, Amjad, 2022. "Determining Pakistan's Financial Dependency: The Role of Financial Globalization and Corruption," MPRA Paper 116097, University Library of Munich, Germany.
    19. ŞENTÜRK, İsmail & Ali, Amjad, 2019. "Socioeconomic Determinants of Gender Specific Life Expectancy in Turkey: A Time Series Analysis," MPRA Paper 97815, University Library of Munich, Germany.
    20. Kumar Narayan, Paresh, 2005. "The relationship between saving and investment for Japan," Japan and the World Economy, Elsevier, vol. 17(3), pages 293-309, August.

    More about this item

    Keywords

    Feldstein-Horioka puzzle; capital mobility; financial crisis.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucd:wpaper:201518. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Geary Tech (email available below). General contact details of provider: https://edirc.repec.org/data/geucdie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.