Revisiting the Feldstein-Horioka Puzzle: An Institutional Sector View

Abstract

Working on a sample of OECD countries spanning the period 1970-2003, this paper contributes to the Feldstein-Horioka literature by making three main innovations:

(1) It estimates, for the first time, regressions at the institutional sector level (households, corporations, and government);

(2) It explores the asymmetry between current account deficits and surpluses; and

(3) It uses advanced panel data techniques to deal with endogeneity and to distinguish long- and short-run effects.

The conclusions of the paper are that:

(i) The national Feldstein-Horioka coefficient is in the vicinity of 0.5, but sectoral coefficients are much lower, a puzzling result possibly explained by endogenous intersectoral saving and investment links;

(iii) The FH coefficients are higher in deficit than in surplus years; and

(iv) The long-run relationship is in all cases below 1, which raises the question as to whether the intertemporal budget constraint should be interpreted.

Keywords: Felstein-Horioka Puzzle, saving, investment, institutional sectors

JEL Classification: F16, F32