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The Feldstein–Horioka puzzle in the presence of structural breaks: evidence from China

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  • Dilem Yildirim
  • Ethem Erdem Orman

Abstract

This study explores the empirical validity of the Feldstein-Horioka puzzle for China in the presence of structural breaks. As such, we employ a recently proposed multiple-break cointegration test. Once the existence of the cointegration between domestic savings and investment is ensured by allowing for endogenous structural breaks, Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimation procedures are implemented to obtain reliable inferences. Empirical results reveal that the relationship between Chinese domestic savings and investment has undergone some major changes. More specifically, with the introduction of managed floating exchange rate regime, a substantial reduction is observed in the almost unitary saving retention coefficient of the fixed exchange rate period. Furthermore, the correlation has experienced a slight increase since 2009, which coincides with the worldwide protectionist policies adopted in the depth of the global financial crisis.

Suggested Citation

  • Dilem Yildirim & Ethem Erdem Orman, 2018. "The Feldstein–Horioka puzzle in the presence of structural breaks: evidence from China," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 23(3), pages 374-392, July.
    • Handle: RePEc:taf:rjapxx:v:23:y:2018:i:3:p:374-392
    DOI: 10.1080/13547860.2017.1396640
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    Cited by:

    1. Cheng, Ya & Awan, Usama & Ahmad, Shabbir & Tan, Zhixiong, 2021. "How do technological innovation and fiscal decentralization affect the environment? A story of the fourth industrial revolution and sustainable growth," Technological Forecasting and Social Change, Elsevier, vol. 162(C).
    2. Maxwell Chukwudi Udeagha & Edwin Muchapondwa, 2023. "Environmental sustainability in South Africa: Understanding the criticality of economic policy uncertainty, fiscal decentralization, and green innovation," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(3), pages 1638-1651, June.
    3. Maxwell Chukwudi Udeagha & Nicholas Ngepah, 2022. "Dynamic ARDL Simulations Effects of Fiscal Decentralization, Green Technological Innovation, Trade Openness, and Institutional Quality on Environmental Sustainability: Evidence from South Africa," Sustainability, MDPI, vol. 14(16), pages 1-35, August.

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