Are error correction models the best alternative to assess capital mobility in developing countries?

Abstract

Jansen (1996) and Jansen and Schulze (1996), based on a sample of developed countries argue that an error correction model would be the correct specification to estimate saving-investment correlations. The purpose of this paper is to verify if the same claim can be made using a sample of developing countries. Regarding developing countries is an error correction model indeed superior, as suggested by Jansen and Jansen and Schulze? How serious is the potential bias from using regressions in levels and in first differences instead of an error correction model? Although the theory implies that there is a long-run relationship between saving and investment, this does not seem to be the case for the majority of the developing economies individually. Therefore, the equation in differences is not poorly specified. Based on this equation it seems to be an intermediate degree of capital mobility in developing countries according to the criterion of Feldstein and Horioka.<br>Jansen (1996) e Jansen e Schulze (1996), baseados numa amostra de países desenvolvidos, argumentam que um modelo de correção de erros seria a especificação correta para estimar a correlação poupança-investimento. O objetivo deste artigo é verificar se o mesmo argumento pode ser feito usando-se uma amostra de países em desenvolvimento. Quando se trata de países em desenvolvimento, um modelo de correção de erros é, de fato, superior? Quão sério é o viés potencial das regressões em níveis e em primeiras diferenças relativamente ao modelo de correção de erros? Embora a teoria implique a existência de uma relação de longo prazo entre poupança e investimento, este não parece ser o caso para a maioria dos países em desenvolvimento. Então, a equação em diferenças não tem problema de especificação. Baseado nesta equação, encontra-se evidência de um grau intermediário de mobilidade de capitais em países em desenvolvimento, de acordo com o critério de Feldstein e Horioka

Capital mobility in Latin American and Caribbean countries: new evidence from dynamic common correlated effects panel data modeling

“…However, as in our case, others have tested the FH puzzle in developing countries, where large investment inflows are essential factors for economic growth. As may be expected in studies in developing countries, Narayan (2005) and Rocha (2006) find a high saving-investment correlation, indicating restricted capital mobility in these countries. However, other studies find increasing capital mobility in developing countries; for example, Holmes (2005), Kim et al (2005), Murthy (2005Murthy ( , 2009 A review of these studies indicates that only a small number, with the exception of Murthy (2009), focus on the degree of capital mobility exclusively in Latin American countries.…”

“…Many economists, using cross-sectional, time-series, and panel data, applying various econometric techniques, have tested the celebrated Feldstein-Horioka puzzle (FH Puzzle) on the existence of varying degrees of capital mobility. Among these, notable studies dealing with the FH Puzzle using time series and cross-sectional data are Coakley and Kulasi (1997), Narayan (2005), Rocha (2006), Chen and Shen (2015), Ketenci (2012), Ma and Li (2016), Dash (2019), Ko and Funashima (2019), Zargar et al (2019), Bineau (2020), and Akkoyunlu (2020). There are more studies that employ panel data; for example, Ho (2002), Holmes (2005), Kim et al (2005), Murthy (2005Murthy ( , 2009, Payne and Kumazawa (2005), Murthy and Anoruo (2010), Narayan and Narayan (2010), Kumar and Rao (2011), Bangake and Eggoh (2012), Holmes and Otero (2014), Johnson and Lamdin (2014), Hernandez (2015), Bibi and Jalil (2016), Drakos et al (2017), Pata (2018), and Eyuboglu and Uzar (2020).…”

The Feldstein–Horioka hypothesis for African countries: Evidence from recent panel error‐correction modelling

“…In recent years, many economists have been interested in empirically testing whether the Feldstein–Horioka puzzle is valid for developing countries. The studies that are widely cited in the literature in this regard are by Montiel (1994), Jansen (1997), Mamingi (1997), Isaksson (2001), Kasuga (2004), Payne and Kumazawa (2005), Rocha (2006), Ozmen (2007), Murthy (2009), Murthy and Anoruo (2010), Narayan (2005), Basher and Fachin (2013), Wang (2013), Latif, Abdullah, and Razdi (2015), Ford and Horioka (2016), Ma and Li (2016), Bibi and Jalil (2016), Cavallo and Pedemonte (2016), Horioka, Terada‐Hagiwara, and Nomoto (2016), Behera (2017). Most of these studies use cross‐sectional, panel and time‐series data to investigate the FH hypothesis.…”