An empirical investigation on the determinants of the saving-investment interaction

Abstract

This study aims to shed light on the Feldstein-Horioka (F-H) puzzle, making use of the potential explanations put forward in the related literature. To this end, the study takes a distinct empirical route, combining a cointegration technique and regression analysis. In the first step, we obtain three definitions for the dependent variable that represent the degree of the interaction between domestic saving and investment (S-I), employing a cointegration analysis for 86 countries in the sample. In the second step, each definition of the dependent variable is regressed on potential explanations for the co-movement of the S-I such as openness, country size, productivity shocks, and real interest rate differentials. After examining a number of potential variables for their explanatory power on this puzzle, however, none of the posited variables are found to be statistically significant determinants of the S-I interaction. The results indicate that the size of the economy, productivity shocks or interest rate differentials have almost no role in explaining the S-I behavior. Further, the findings show that openness has no influence on the S-I interaction, suggesting that it is not plausible to view the S-I correlation as an indicator of international capital mobility as F-H did

Capital Mobility in the World: TPP Experience

“…Kalyoncu (2007) discovered that Denmark, France, Greece, Italy, Japan, Spain, Sweden, Turkey, and the United Kingdom show low capital mobility in OECD countries. Gur, Erden, and Ozkan (2011) found that openness of the economy has no influence on the saving-investment link and found that it is not plausible to use the relationship as an indicator of international capital mobility. Brunel and Sassari (2013) showed that the estimated saving-retention coefficient is close to zero for 21 OECD countries when global shocks are taken into account by common factors.…”