The Feldstein--Horioka puzzle in South Africa: A fractional cointegration approach

Luis Gil-Alana, Christophe André, Rangan Gupta, Tsangyao Chang and Omid Ranjbar ()

The Journal of International Trade & Economic Development, 2016, vol. 25, issue 7, 978-991

Abstract: The Feldstein--Horioka (FH) puzzle, that is the strong correlation between saving and investment in a world where obstacles to capital mobility are limited, has been studied extensively since it was exposed in 1980. Even though the theoretical and empirical literature has examined many of its potential causes, the puzzle persists. This paper aims at shedding further light on the issue by investigating the relationship between saving and investment in South Africa since 1946 using fractional integration and cointegration techniques to account for high persistence in the series. We find evidence of fractional cointegration between saving and investment, indicating some degree of persistence in the gap between the two variables. We also find a structural break in saving and investment ratios to GDP around 1980, which roughly coincides with the start of a financial deregulation process in South Africa. While fractional cointegration holds before the break, it does not thereafter. In other words, while the FH puzzle is observed before the start of financial deregulation, it subsequently disappears. This suggests that financial deregulation may have loosened the link between saving and investment.

Date: 2016
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Working Paper: The Feldstein-Horioka Puzzle in South Africa: A Fractional Cointegration Approach (2015)
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DOI: 10.1080/09638199.2016.1151545

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