Investment and Saving in the European Union: Another Look at Feldstein–Horioka

In this chapter, we employ data from a panel consisting of 28 European Union (EU) member countries over the period 1990–2020 to examine the validity of the famous Feldstein– Horioka (F–H) puzzle. Despite many criticisms, the F–H saving–investment correlation hypothesis is still used in the literature to infer the degree of capital mobility among countries. To this end, we apply a battery of panel unit root and cointegration tests. The finding of the presence of cointegration of the savings and investment ratios and the observed magnitude of the estimated average saving-retention coefficient for the panel reveal that for this panel of EU member countries, the F–H puzzle is not valid and the long-run international solvency condition is maintained in most of these countries. The observed low saving-retention coefficients for these countries imply a moderate degree of capital mobility and the absence of the F–H puzzle. This finding of the prevalence of a moderate degree of capital mobility is consistent with the macroeconomic experience of these countries during the period under investigation.