Capital mobility in Latin American and Caribbean countries: alternative view on the “Feldstein-Horioka” coefficient

Valeryia Yersh

International Journal of Emerging Markets, 2022, vol. 19, issue 4, 989-1006

Abstract: Purpose - The purpose of this study is to examine two issues, namely the degree of current account deficit (CAD) sustainability and the degree of capital mobility. Design/methodology/approach - The sample for this study comprises 24 Latin American and Caribbean countries, including three regional agreements: Andean Community, MERCOSUR (Mercado Común del Sur), and SICA (Central American Integration System). This study employs the dynamic common correlated effects mean group (DCCEMG) estimator in a panel data set to investigate the long-run relationship between savings and investment along with short-run dynamics. Findings - The findings indicate that CAD is weakly sustainable in the Latin American and Caribbean region, MERCOSUR, and SICA, while CAD is strongly unsustainable in the Andean Community. The sub-period analysis reveals that CAD has been adversely affected by the 2008 crisis. However, in the post-crisis period, CAD has been slowly decreasing in the Latin American and Caribbean region and Andean Community, whereas CAD has continued increasing in MERCOSUR and SICA. Further, the estimates of error-correction terms and short-run coefficients indicate that the Andean Community and MERCOSUR observe a higher degree of long-run and short-run capital mobility than SICA. Practical implications - The results carry fundamental implications for policy-making processes aimed at maintaining sustainable CADs. Originality/value - This study gives an alternative interpretation of the “Feldstein-Horioka” coefficient in terms of CAD sustainability and analyses the saving–investment relationship in light of Chudik and Pesaran (2015).

Keywords: Saving-investment–relationship; Capital mobility; Feldstein-Horioka puzzle; Current account deficit sustainability; DCCEMG; Latin America and the Caribbean; C30; F21; F32; F34; F40 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-04-2021-0533

DOI: 10.1108/IJOEM-04-2021-0533

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