International capital mobility: linking the Feldstein--Horioka puzzle to the trade and equity home bias puzzles

Clemens Kool and Linda M. Keijzer

Cambridge Journal of Regions, Economy and Society, 2009, vol. 2, issue 2, 211-227

Abstract: We revisit the Feldstein--Horioka (FH) puzzle using data for 23 Organisation for Economic Co-operation and Development (OECD) countries for the period 1973--2003. We document a sharp decline in the FH coefficient from the mid-1990s onward, supporting the hypothesis of increased economic and financial integration. Subsequently, we extend the literature and use a non-linear specification with interaction terms to empirically show that observed decreases in equity home bias (EHB) and increases in trade openness are structurally linked to the time variation in the FH coefficient. Thus, this paper empirically establishes a structural link between three puzzles in international macroeconomics and finance: the FH puzzle, the EHB puzzle and the trade home bias puzzle. Copyright 2009, Oxford University Press.

Date: 2009
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