Capital mobility in Latin American and Caribbean countries: alternative view on the “Feldstein-Horioka” coefficient

Abstract

PurposeThe purpose of this study is to examine two issues, namely the degree of current account deficit (CAD) sustainability and the degree of capital mobility.Design/methodology/approachThe sample for this study comprises 24 Latin American and Caribbean countries, including three regional agreements: Andean Community, MERCOSUR (Mercado Común del Sur), and SICA (Central American Integration System). This study employs the dynamic common correlated effects mean group (DCCEMG) estimator in a panel data set to investigate the long-run relationship between savings and investment along with short-run dynamics.FindingsThe findings indicate that CAD is weakly sustainable in the Latin American and Caribbean region, MERCOSUR, and SICA, while CAD is strongly unsustainable in the Andean Community. The sub-period analysis reveals that CAD has been adversely affected by the 2008 crisis. However, in the post-crisis period, CAD has been slowly decreasing in the Latin American and Caribbean region and Andean Community, whereas CAD has continued increasing in MERCOSUR and SICA. Further, the estimates of error-correction terms and short-run coefficients indicate that the Andean Community and MERCOSUR observe a higher degree of long-run and short-run capital mobility than SICA.Practical implicationsThe results carry fundamental implications for policy-making processes aimed at maintaining sustainable CADs.Originality/valueThis study gives an alternative interpretation of the “Feldstein-Horioka” coefficient in terms of CAD sustainability and analyses the saving–investment relationship in light of Chudik and Pesaran (2015).

International trade fluctuations: Global versus regional factors

“…First, the increasing importance of the regional factor at the expense of the country factor in the Mercosur region, which is in line with the development of the trading block. Second, CARICOM tends to have the largest share of variance attributable to the country factor, where this may be due to the fact that the countries within this group are very heterogeneous in terms of population, GDP per capita, development, geography and sectors of productive capacity (Yersh, 2022). For example, in 2018, Haiti is shown to have a GDP per capita of $868.30, while Barbados is reported as $17,949.30 (The World Bank, 2023).…”