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The Feldstein-Horioka hypothesis revisited

Author

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  • Dzhumashev Ratbek

    (Monash University – Economics, 1 Wellington road, Clayton, Victoria 3800, Australia)

  • Cooray Arusha

    (University of Nottingham – Economics, Kuala-Lumpur, Malaysia)

Abstract

Feldstein-Horioka hypothesis states that if there is perfect capital mobility, low correlation between domestic investment and savings should be observed. However, empirical analysis failed to confirm the hypothesis. This study attempts to shed a new light on international capital mobility by incorporating the effect of the fiscal balance and the financial balance. Specifically, for a panel of 161 countries over the 1990–2013 period, the extended model is tested in comparison with the existing models of capital mobility. At the aggregate level, strong support is found for the extended model; while, at the region disaggregated level, compared to the existing models the hypothesis of capital mobility holds for a larger number of regions. Our model and estimates are additionally extended to account for the fact that the above mentioned relationships, are conditional on the country’s level of financial development.

Suggested Citation

  • Dzhumashev Ratbek & Cooray Arusha, 2017. "The Feldstein-Horioka hypothesis revisited," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(1), pages 1-30, January.
    • Handle: RePEc:bpj:bejmac:v:17:y:2017:i:1:p:30:n:6
    DOI: 10.1515/bejm-2016-0009
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    References listed on IDEAS

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    Cited by:

    1. Makin, Anthony J. & Ratnasiri, Shyama, 2023. "New estimates of international capital mobility for select OECD economies," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 127-138.
    2. Kateřina Šímová, 2020. "Verification of Feldstein-Horioka Puzzle (Example of European Union Countries) [Verifikace Feldsteinovy–Horiokovy hádanky (příklad zemí Evropské unie)]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(2).
    3. Kateřina Šímová, 2020. "Verification of Feldstein-Horioka Puzzle (Example of European Union Countries) [Verifikace Feldsteinovy-Horiokovy hádanky (příklad zemí Evropské unie)]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(2), pages 43-60.
    4. Beckmann, Joscha & Belke, Ansgar & Gros, Daniel, 2022. "Savings–investment and the current account More measurement than identity," Journal of International Money and Finance, Elsevier, vol. 121(C).
    5. Taofeek Olusola Ayinde & Olumuyiwa Ganiyu Yinusa & Yulia Rodionova, 2018. "Global and Regional Capital Mobilities in Sub-Saharan African Economies: Complement or Substitute?," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 68(4), pages 51-71, October-D.

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    More about this item

    Keywords

    capital mobility; Feldstein-Horioka; fiscal balance; investment; saving; Shibata-Shintani;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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