The Feldstein-Horioka Puzzle: A Panel Smooth Transition Regression Approach

Economic Modelling Vol. 25 (2) 284-299

31 Pages Posted: 18 Aug 2016

See all articles by Julien Fouquau

Julien Fouquau

University of Orleans

Christophe Hurlin

University of Orleans

Isabelle Rabaud

University of Orleans

Date Written: March 15, 2008

Abstract

This paper proposes a panel threshold specification of the Feldstein Horioka puzzle. Based on a panel of 24 OECD countries (1960-2000), we test the influence of various threshold variables (degree of openness, size, demography) on the saving-retention coefficient. Given this objective, we estimate various specification of a Panel Smooth Threshold Regression (PSTR) model recently developed by Gonzalez, Teräsvirta and Van Dijk (2005). One of our main results is the existence of strong threshold effects in the relationship between domestic investment and saving: whatever the transition mechanism specified, each test strongly reject the linearity assumption. Moreover, these specifications allow both cross country heterogeneity and the instability in the degree of capital mobility. Consequently, it is possible to give estimates of Feldstein-Horioka coefficient at any time and for each country in the sample.

Keywords: Feldstein Horioka Puzzle, Panel Smooth Threshold Regression Models, saving-investment association, capital mobility

JEL Classification: C23, F21, F32

Suggested Citation

Fouquau, Julien and Hurlin, Christophe and Rabaud, Isabelle, The Feldstein-Horioka Puzzle: A Panel Smooth Transition Regression Approach (March 15, 2008). Economic Modelling Vol. 25 (2) 284-299, Available at SSRN: https://ssrn.com/abstract=2823420 or http://dx.doi.org/10.2139/ssrn.2823420

Julien Fouquau (Contact Author)

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

Christophe Hurlin

University of Orleans ( email )

Université d'Orléans
Rue de Blois B.P. 6739 45
France

Isabelle Rabaud

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

HOME PAGE: http://www.leo-univ-orleans.fr/fr/membres/#isabelle.rabaud@univ-orleans.fr

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