The Feldstein-Horioka Puzzle in the Presence of Structural Breaks: Evidence from China

Dilem Yildirim and Ethem Erdem Orman ()
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Ethem Erdem Orman: Republic of Turkey Prime Ministry Undersecretariat of Treasury

No 1601, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: This study explores the empirical validity of the Feldstein-Horioka puzzle for China in the presence of structural breaks. To this end, we employ the recently proposed multiple-break cointegration test of Maki (2012), along with the one-break Gregory and Hansen (1996) 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 from the cointegrating regression. Empirical results reveal that the relationship between Chinese domestic savings and investment has changed with the regime shift towards flexible exchange rates and the 2008-2009 global financial crises. 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.

Keywords: Feldstein-Horioka puzzle; saving-investment association; capital mobility; exchange rate regimes; 2008-2009 global financial crises; cointegration; structural breaks; China (search for similar items in EconPapers)
JEL-codes: C22 C51 E21 E22 F21 G01 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2016-01, Revised 2016-01
New Economics Papers: this item is included in nep-cna, nep-mac, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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