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

Abstract

This paper, by applying the recent panel data error‐correction modelling developed by Gengenbach et al., Panel error correction testing with global stochastic trends, 2008 University of Maastricht, Working Paper, RM/08/051:1–51 and Gengenbach et al., Journal of Applied Econometrics, 2016, 31, 982–1004 tests the validity of the Feldstein–Horioka puzzle (1980) in a panel of 27 African countries for the period 1965–2015. Unlike the existing studies in the literature, this paper, for the first time, addresses several important panel data econometric issues such as slope heterogeneity, cross‐section dependence, unobservable common factors, non‐stationarity and endogeneity that would yield inconsistent and biased estimates of the parameters of interest. Unlike the previous residual‐based error‐correction modelling that has low power, the Gengenbach et al., Panel error correction testing with global stochastic trends, 2008, University of Maastricht, Working Paper, RM/08/051:1–51 and Gengenbach et al., Journal of Applied Econometrics, 2016, 31, 982–1004 estimator explicitly considers structural dynamics in modelling a cointegrated panel that allows for the presence of non‐stationary unobserved common factors. As the GUW modelling depends on the Pesaran Common Correlated Effects Mean Group Estimator (CCEMG; 2006) and the Chudik and Pesaran Dynamic Common Correlated Effects Mean Group Estimator (DCCEMG; 2015), we report the results based on these estimators. The econometric exercises performed in the paper show that slope heterogeneity; cross‐section dependence and non‐stationarity are present in the panel data sample used in the estimation. Estimations yield a relatively low magnitude of the savings retention coefficient for the panel members included in the study with a negative error‐correction term that is statistically significant at the individual and panel levels. The empirical evidence rejects the presence of the Feldstein–Horioka puzzle in the panel of 27 African countries studied.

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

“…Some authors estimate an error-correction model and find that the long-run or the so-called Feldstein-Horioka coefficient is not statistically different from one, which is in line with the intertemporal budget constraint (Nell and Santos, 2008; Nasiru and Haruna, 2013; Ma and Li, 2016; Drakos et al. , 2017; Murthy and Ketenci, 2020a).…”

“…, 2014; Drakos et al. , 2017, 2018; Pata, 2018; Beck and Stanek, 2019; Tursoy and Faisal, 2019; Murthy and Ketenci, 2020a, b; Beck, 2020 among others). One of the most widely accepted explanations of the puzzle is related to the solvency condition of the current account (CA).…”

International and Regional Capital Mobility in Latin American Countries

“…Even though there is a plethora of empirical studies investigating the Feldstein-Horioka puzzle in advanced economies, there are not many studies dealing with the puzzle in emerging economies, especially Latin American and Caribbean countries. Some studies analyzing East-Asian and African countries have revealed low saving-retention coefficient, contradicting the Feldstein-Horioka puzzle (Narayan, 2005;Guillaumin, 2009;Wang, 2013;Raheem, 2017;Murthy & Ketenci, 2021), while other papers have found little evidence on increased capital flows (Kim et al, 2007;Mitra, 2017;Kaur & Sarin, 2018;Patra & Mohanty, 2020;Yilanci & Kilci, 2021). A limited number of studies focusing on the degree of international capital mobility in the region of Latin America and the Caribbean have demonstrated low saving-retention coefficient, an indicator of high capital mobility (Murthy, 2009;Rocha, 2009;Kumar, 2015;Cavallo & Pedemonte, 2016); however, the studies either analyse a limited sample of Latina American and Caribbean countries or employ outdated panel estimation techniques or as in case of Kumar (2015) focus only on one of the Latina American regional integration agreements (MERCOSUR).…”