Is the Feldstein-Horioka Puzzle Really a Puzzle?
Using the framework of a dynamic intertemporal optimization model of an open economy, it is shown that the long-run investment-saving correlation follows directly from the economy's dynamic budget constraint and this does not depend on the degree of international capital mobility. Therefore, unless the budget constraint is violated, the time series of investment and saving should be cointegrated, and this should be true for any degree of capital mobility. Using an improved econometric technique, which encompasses the tests used by previous authors and avoids some of the pitfalls associated with their tests, I show that their conflicting findings can be explained by a simple but important, omitted variables problem. Using annual and quarterly post-war U.S. data, I find that investment and saving are cointegrated in levels as well as in rates, regardless of the time period considered, as predicted by the model.
|Date of creation:||07 Feb 2004|
|Date of revision:||12 May 2005|
|Note:||Type of Document - pdf; prepared on Win 98; to print on Any printer; pages: 33 ; figures: Figures are included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J. & Mankiw, N Gregory & Sala-i-Martin, Xavier, 1994.
"Capital Mobility in Neoclassical Models of Growth,"
CEPR Discussion Papers
1019, C.E.P.R. Discussion Papers.
- Barro, R. & Mankiw, G., 1992. "Capital Mobility in Neoclassical Models of Growth," Harvard Institute of Economic Research Working Papers 1615, Harvard - Institute of Economic Research.
- Barro, R.J. & Mankiw, N.G. & Sala-i-Martin, X., 1992. "Capital Mobility in Neoclassical Models of Growth," Papers 655, Yale - Economic Growth Center.
- Robert J. Barro & N. Gregory Mankiw & Xavier Sala-i-Martin, 1992. "Capital Mobility in Neoclassical Models of Growth," NBER Working Papers 4206, National Bureau of Economic Research, Inc.
- Robert J. Barro & N. Gregory Mankiw & Xavier Sala-i-Martin, 1994. "Capital mobility in Neoclassical models of growth," Economics Working Papers 82, Department of Economics and Business, Universitat Pompeu Fabra.
- Sachsida, Adolfo & Caetano, Marcelo Abi-Ramia, 2000.
"The Feldstein-Horioka puzzle revisited,"
Elsevier, vol. 68(1), pages 85-88, July.
- Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-29, June.
- Jeffrey A. Frankel & Alan T. MacArthur, 1987.
"Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries,"
NBER Working Papers
2309, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A. & MacArthur, Alan T., 1988. "Political vs. currency premia in international real interest differentials : A study of forward rates for 24 countries," European Economic Review, Elsevier, vol. 32(5), pages 1083-1114, June.
- Jeffrey A. Frankel and Alan T. MacArthur., 1987. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," Economics Working Papers 8762, University of California at Berkeley.
- Daniel Levy, 2005.
"Investment-Saving Comovement under Endogenous Fiscal Policy,"
- Daniel Levy, 1995. "Investment-saving comovement under endogenous fiscal policy," Open Economies Review, Springer, vol. 6(3), pages 237-254, July.
- Tsoukis, C. & Alyousha, A., 2000. "A Re-Examination of Saving - Investment Relationships: Cointegration, Causality and International Capital Mobility," Papers 271, Universite de Nantes - Economie Internationale et de l'Entreprise.
- Martin Feldstein, 1991.
"Domestic Saving and International Capital Movements in the Long Run and the Short Run,"
in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353
National Bureau of Economic Research, Inc.
- Feldstein, Martin, 1983. "Domestic saving and international capital movements in the long run and the short run," European Economic Review, Elsevier, vol. 21(1-2), pages 129-151.
- 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.
- Helen Popper, 1990. "International capital mobility: direct evidence from long-term currency swaps," International Finance Discussion Papers 386, Board of Governors of the Federal Reserve System (U.S.).
- Frankel, Jeffrey A., 1989.
"Quantifying International Capital Mobility in the 1980s,"
Department of Economics, Working Paper Series
qt4fw7c7bh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Jeffrey A. Frankel, 1991. "Quantifying International Capital Mobility in the 1980s," NBER Chapters, in: National Saving and Economic Performance, pages 227-270 National Bureau of Economic Research, Inc.
- Jeffrey A. Frankel, 1989. "Quantifying International Capital Mobility in the 1980s," NBER Working Papers 2856, National Bureau of Economic Research, Inc.
- Glenn Otto & Tony S. Wirjanto, 1989. "National Savings and Domestic Investment in the Long Run: Some Time Series Evidence for the U.S. and Canada," Working Papers 754, Queen's University, Department of Economics.
- Miller, Stephen M., 1988. "Are saving and investment co-integrated?," Economics Letters, Elsevier, vol. 27(1), pages 31-34.
- Daniel Levy, 2005.
"Investment-Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series,"
0505006, EconWPA, revised 16 May 2005.
- Daniel Levy, 2000. "Investment-Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 100-137, January.
- Baxter, M. & Crucini, M.J., 1990.
"Explaining Saving/Investment Correlation,"
RCER Working Papers
224, University of Rochester - Center for Economic Research (RCER).
- Levy, D., 1990. "Investment-Saving Comovement, Capital Mobility, And Fiscal Policy," Papers 90-91-04, California Irvine - School of Social Sciences.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, vol. 102(414), pages 1162-70, September.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, October.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0402002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.