European Integration and the Feldstein–Horioka Puzzle

Abstract

We estimate the Feldstein-Horioka equation for the period 1960-2012 and find structural breaks that coincide with the introduction of the European single market in 1993, the introduction of the euro in 1999 and the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, we find that the pattern of capital flows within the euro zone reflect differences in output per capita, the rate of growth of output per capita and budget balances.

The realised and unrealised benefits of the EU Single Market: current views

“…They reduce information asymmetries between the value chain participants in the Single Market (Blind et al, 2017). Katsimi and Zoega (2016) estimate the investment-saving equation (a Feldstein-Horioka model) with the difference-in-difference methodology and demonstrate that the Single Market and, later on, the euro have increased capital mobility among the Member States beyond what is observed in the control group of countries outside the analysed agreements. Consequently, one can conclude that the institutional changes following the Maastricht Treaty have improved capital allocation in Europe from a macroeconomic perspective.…”

Revisiting the Feldstein-Horioka puzzle for Turkey

“…1 A second stream of literature relates to an improper modelling of the saving and investment relationship for the explanation of the FH puzzle, as Feldstein and Horioka (1980) use cross-sectional and time-averaged data in order to eliminate the pro-cyclical nature of savings and investment. However, the Feldstein and Horioka (1980) methodology is criticized on a number of grounds: the FH sample period was very short to capture increases in capital mobility in the second half of the 1970s; time-averaged data in crosssectional regressions overestimate or underestimate the true relationship; the nature of shocks and the structure of the economy for each country should have been taken into account; outliers, the choice of the time period, endogeneity, the regime changes, the omitted variables' bias, a constant in the regression, non-stationarity of variables in levels, and cointegration techniques; and short-run dynamics of the relationship between savings and investment should have been considered (Choudhry, Kling, & Jayasekera, 2014;De Vita & Abbott, 2002;Dooley, Frankel, & Mathieson, 1987;Ho, 2002;Jansen & Schulze, 1996;Katsimi & Zoega, 2016;Krol, 1996;Miller, 1988;Obstfeld, 1986Obstfeld, , 1995Sachs, 1981;Serletis & Gogas, 2007;Sinn, 1992). Therefore, the saving-investment relationship for individual countries with time-series analysis has been investigated to overcome the drawbacks of cross-sectional analysis such as sample selection bias, and the neglect of the country-specific saving-investment structure, structural changes, government policies, and country-specific shocks (e.g., De Vita & Abbott, 2002;Miller, 1988 for the US 2 ).…”

On the Sources of the Feldstein–Horioka Puzzle across Time and Frequencies

“…On the other hand, for countries such as Argentina, Australia, Canada, Finland, and Sweden, we find that the positive link between saving and investment becomes stronger in the latter period. 3 For example, see Hussein (1998), Georgopoulos and Hejazi (2005), Evans, Kim and Oh (2008), Fouquau, Hurlin and Rabaud (2008), and Katsimi and Zoega (2016), among others. 4 See, for example, Sarno and Taylor (1998), Corbin (2004), andHoffmann (2004), among others.…”