Is the Feldstein-Horioka Puzzle History?

22 Pages Posted: 12 Aug 2004

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Jerry Coakley

University of Essex - Essex Business School

Fabio Spagnolo

Brunel University London - Economics and Finance

Abstract

A country's intertemporal budget constraint implies current account stationarity or that its saving and investment rates should cointegrate. However, such behaviour may not pertain in finite sample spans where the current account could be subject to persistent shocks. Accordingly, this paper reconsiders the Feldstein-Horioka puzzle for a panel of 12 OECD economies 1980I-2000IV using a mean group regression approach that is robust to persistent innovations and accounts for country heterogeneity and cross-sectional dependence. The mean group estimates are notably smaller than that from the conventional cross-section estimator and are statistically insignificant. Our findings support the view that capital is highly mobile in the long run for OECD economies despite persistence in the current account.

Suggested Citation

Fuertes, Ana-Maria and Coakley, Jerry and Spagnolo, Fabio, Is the Feldstein-Horioka Puzzle History?. Manchester School, Vol. 72, No. 5, pp. 569-590, September 2004. Available at SSRN: https://ssrn.com/abstract=573022

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Jerry Coakley (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

Fabio Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 816383 (Phone)
+44 1895 203303 (Fax)

HOME PAGE: http://www.brunel.ac.uk/depts/ecf/Staff/SpagnoloF/Main.htm

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