A New Look at the Feldstein-Horioka Puzzle Using an Integrated Panel
European University Institute - Department of Economics; University of Oxford - Department of Economics
We use a panel of 14 European countries to take a fresh look at the so-called Feldstein-Horioka puzzle on the high correlations between savings and investment observed within countries. A large literature has emerged to investigate this issue, using both individual country-by-country data and panels constructed by pooling data from several countries although the answers remain by and large elusive. Since we argue that the savings and investment series in our panel are integrated of order one, we use the recently developed theory of panel unit roots and cointegration to look at the relationship between savings and investment. Our particular contributions are (a) to consider the puzzle comprehensively, using both time series and panel methods for integrated series; (b) to consider subsets of countries in the panel; and (c) to apply tests of the hypothesis to various disaggregates and transformations of the core datasets, with our particular interest centering on the implications for fiscal policy. We also interpret the findings of our tests in the light of the likely presence of cross-country cointegration (which is known to affect the properties of the tests for unit roots and cointegration.
Keywords: Saving; investment; capital mobility; panel cointegration
JEL Classification: C31, C33, F32, F41working papers series
Date posted: August 29, 2005
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.391 seconds