International Capital Mobility: Linking the Feldstein-Horioka Puzzle to the Trade and Equity Home Bias Puzzles

Posted: 4 Jul 2009

See all articles by Clemens J.M. Kool

Clemens J.M. Kool

Utrecht University - School of Economics

Linda Keijzer

Utrecht University - School of Economics

Date Written: July 2009

Abstract

We revisit the Feldstein-Horioka (FH) puzzle using data for 23 Organisation for Economic Co-operation and Development (OECD) countries for the period 1973-2003. We document a sharp decline in the FH coefficient from the mid-1990s onward, supporting the hypothesis of increased economic and financial integration. Subsequently, we extend the literature and use a non-linear specification with interaction terms to empirically show that observed decreases in equity home bias (EHB) and increases in trade openness are structurally linked to the time variation in the FH coefficient. Thus, this paper empirically establishes a structural link between three puzzles in international macroeconomics and finance: the FH puzzle, the EHB puzzle and the trade home bias puzzle.

Keywords: economic and financial integration, savings-investment correlation, current account imbalances

JEL Classification: F21, F32, G15

Suggested Citation

Kool, Clemens J.M. and Keijzer, Linda, International Capital Mobility: Linking the Feldstein-Horioka Puzzle to the Trade and Equity Home Bias Puzzles (July 2009). Cambridge Journal of Regions, Economy and Society, Vol. 2, Issue 2, pp. 211-227, 2009. Available at SSRN: https://ssrn.com/abstract=1429242 or http://dx.doi.org/10.1093/cjres/rsp005

Clemens J.M. Kool (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Linda Keijzer

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

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