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Validity of F-H hypothesis in small isolated island economy: an application of the combined cointegration approach

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  • Turgut Tursoy
  • Faisal Faisal

Abstract

This study aims to investigate the Feldstein-Horioka hypothesis for North Cyprus using ARDL bounds test for cointegration for period 1983–2012. The robustness of the ARDL was done by the newly developed Bayer-Hanck (2013) combined cointegration test. The empirical results revealed that both savings and investments are cointegrated, while the findings from the long-run and short-run analysis validate the F-H hypothesis suggesting, that North Cyprus have closed-economy in which domestic investments are related to domestic savings. Furthermore, investment converges to its long-run equilibrium position by 43.95% speed of adjustments using channel of savings. Finally, the result of Granger causality under the framework of ECM suggests that savings cause investment in short-run, long-run and both joint short-run and long-run causality.

Suggested Citation

  • Turgut Tursoy & Faisal Faisal, 2019. "Validity of F-H hypothesis in small isolated island economy: an application of the combined cointegration approach," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 26(4), pages 478-488, July.
    • Handle: RePEc:taf:raaexx:v:26:y:2019:i:4:p:478-488
    DOI: 10.1080/16081625.2017.1284597
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