Testing the Feldstein-Horioka Puzzle in Transition Economies

Abstract

Article HistoryThe relationship between domestic savings and investments has become one of the most important issues discussed in economic theory with globalization of national financial markets. Is really domestic investment financed by global funds or domestic savings are still an important fund source for domestic investments? In this study, the relationship between savings and investments between years 1995 and 2014 is tested by panel data method in the transition economies (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Romania, Bulgaria) transited from the central planning to the free market economy. As a result of the empirical analysis, Feldstein-Horioka puzzle is not valid for most of the transition economies thanks to financial funds came from European Union's development funds.Contribution/ Originality: This study contributes to existing literature in two ways. First of all, by examining transition economies in Eastern and Central Europe, we test the effect of foreign direct investments coming from Western European economies. Secondly, we employ numerous econometric analysis methods in order to obtain more robust results.

G20 Ülkeleri İçin Feldstein-Horioka Bulmacasının Geçerliliğinin Panel Veri Yöntemi ile Sınanması

“…In other words, this study concluded that the FH hypothesis is invalid in G20 countries. Because Feldstein and Horioka found a coefficient between 0,95 and 0,85 in their studies, it shows that the coefficient found is much lower than they estimated (Adıgüzel et al, 2017). The emergence of a more integrated world economy with the increase in economic freedom and the removal of barriers to goods, services, capital flows and international migration, that is, globalization (Bahtiyar and Yaglikara, 2022) is the most important reason for high capital mobility.…”