The Feldstein-Horioka Fact

24 Pages Posted: 28 Oct 2004

See all articles by Domenico Giannone

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Michele Lenza

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2004


This Paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment observed in OECD countries. We introduce a novel factor augmented panel regression to control for general equilibrium effects where global shocks are allowed to affect each country with specific magnitude and lag structure. We show that the homogeneity restriction on the propagation of global shocks across countries is rejected by the data and biases the saving-retention coefficient estimated in previous studies. By relaxing this assumption, the saving-retention coefficient remains high in the 70s but decreases considerably over time becoming very small in the last two decades. This finding is explained by the increased capital mobility in OECD countries.

Keywords: Saving-correlation, capital mobility, international co-movement, dynamic factor model

JEL Classification: C23, F32, F41

Suggested Citation

Giannone, Domenico and Lenza, Michele, The Feldstein-Horioka Fact (September 2004). CEPR Discussion Paper No. 4610. Available at SSRN:

Domenico Giannone (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

Michele Lenza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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