Is the Feldstein-Horioka Puzzle Really a Puzzle?

ASPECTS OF GLOBALIZATION: MACROECONOMIC AND CAPITAL MARKET LINKAGES IN THE INTEGRATED WORLD ECONOMY, pp. 49-66, Christopher Tsoukis, George M. Agiomirgianakis, and Tapan Biswas, eds., Kluwer Academic Publishers, London, 2004

Posted: 14 Feb 2004

See all articles by Daniel Levy

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis

Abstract

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.

Keywords: Capital Mobility, Investment-Saving Correlation, Dynamic Budget Constraint, Integration, Cointegration, Omitted Variables in Cointegration, International Capital Movements, Long-Term Capital Mobility, Feldstein-Horioka Puzzle, Investment-Saving Comovement, Intertemporal Optimization

JEL Classification: F02, F21, F32, C32, C50

Suggested Citation

Levy, Daniel, Is the Feldstein-Horioka Puzzle Really a Puzzle?. ASPECTS OF GLOBALIZATION: MACROECONOMIC AND CAPITAL MARKET LINKAGES IN THE INTEGRATED WORLD ECONOMY, pp. 49-66, Christopher Tsoukis, George M. Agiomirgianakis, and Tapan Biswas, eds., Kluwer Academic Publishers, London, 2004, Available at SSRN: https://ssrn.com/abstract=500402

Daniel Levy (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 5290002
Israel
+972 3 531-8345 (Phone)
+972 3 738-4034 (Fax)

HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )

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Rich Building
Atlanta, GA 30322-0001
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html

Rimini Center for Economic Analysis ( email )

Wilfrid Laurier University
75 University Ave W.
Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://rcea.org/

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