Is the Feldstein-Horioka puzzle really a puzzle?

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

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 aIillual 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.
Original languageAmerican English
Title of host publicationAspects of Globalisation
EditorsChristopher Tsoukis, George M. Agiomirgianakis, Tapan Biswas
PublisherSpringer US
Pages49-66
ISBN (Print)978-1-4419-8881-2
StatePublished - 2004

Fingerprint

Dive into the research topics of 'Is the Feldstein-Horioka puzzle really a puzzle?'. Together they form a unique fingerprint.

Cite this