Is the Feldstein-Horioka Puzzle Really a Puzzle?

Arbeitspapier

Using the framework of a dynamic intertemporal optimization model of an open economy, it is shown that the long-run investment-saving correlation follows directly from the economy’s dynamic budget constraint and this does not depend on the degree of international capital mobility. Therefore, unless the budget constraint is violated, the time series of investment and saving should be cointegrated, and this should be true for any degree of capital mobility. Using an improved econometric technique, which encompasses the tests used by previous authors and avoids some of the pitfalls associated with their tests, I show that their conflicting findings can be explained by a simple but important, omitted variables problem. Using annual and quarterly post-war U.S. data, I find that investment and saving are cointegrated in levels as well as in rates, regardless of the time period considered, as predicted by the model.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2003-02

Classification and Topics

• Classification: Wirtschaft ; International Investment; Long-term Capital Movements ; Current Account Adjustment; Short-term Capital Movements ; International Economic Order and Integration ; Open Economy Macroeconomics
• Subject: Capital Mobility ; Investment-Saving Correlation ; Dynamic Budget Constraint ; Integration and Cointegration ; Omitted Variables

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Levy, Daniel
• Event: Veröffentlichung
• (who): Bar-Ilan University, Department of Economics
• (where): Ramat-Gan
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/259334
• Last update: 10.03.2025, 11:45 AM CET