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Investment Home Bias in the European Union

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  • António Martins

Abstract

The creation of the European Single Market (ESM) and the adoption of the Euro elim-inated barriers for capital mobility. This paper analysis the dependency of investmenton domestic savings across European Union (EU) economies over three different timeframes split by major milestones in the economic history of the union. Using a panel error correction model, I find evidence of low capital mobility before the creation ofthe ESM and after the crisis of 2008, suggesting that a solvency constraint can bindinvestment to domestic savings even when barriers for capital mobility are eliminated.The estimates suggest that there is a long-run relationship between the aforemen-tioned aggregates associated with a solvency constraint. However, this constraint doesnot appear to be binding between 1993 and 2007, matching with an increased spreadin the current account balances between high and low income economies among the EU. Between 2007 and 2020, restrictions on borrowing faced by some EU economiesreduced capital mobility, despite the absence of capital controls and exchange rate risk.

Suggested Citation

  • António Martins, 2020. "Investment Home Bias in the European Union," Working Papers REM 2020/0139, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp01392020
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    Keywords

    Current Account; Savings; Investment; Capital Mobility; Feldstein-HoriokaPuzzle;
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