Globalization and the Feldstein-Horioka puzzle

Javed Younas and Debasish Chakraborty

Applied Economics, 2011, vol. 43, issue 16, pages 2089-2096

Abstract: Capital account liberalization and the integration of world financial markets should increase capital mobility across countries. This article uses the Feldstein-Horioka savings-investment methodology to examine the impact of economic globalization on the degree of capital mobility in 99 countries over the period 1970 to 2005. Our findings suggest that economic openness and financial market integration have led to increased capital mobility in developed as well as developing countries. However, their effect appears to be larger for the latter. This also implies that countries with more financial openness can run higher current account deficits due to better access to external capital markets. Our results also support the previous findings that foreign aid supplements domestic savings for investment in developing countries.

Date: 2011
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