EconPapers    
Economics at your fingertips  
 

Cointegration with Structural Breaks: An Application to the Feldstein-Horioka Puzzle

Mohitosh Kejriwal

Studies in Nonlinear Dynamics & Econometrics, 2008, vol. 12, issue 1, 39

Abstract: This paper revisits the well known Feldstein-Horioka saving-investment correlation puzzle from a time series perspective using a sample of 21 OECD countries. We argue that the strong positive correlation between saving and investment as originally identified by Feldstein and Horioka (1980) arises due to the neglect of the nonstationary properties of the variables as well as the failure to account for potential instabilities in the long run relationship between them. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2006a) as well as the cointegration test in Arai and Kurozumi (2005) extended to allow for multiple breaks under the null hypothesis of cointegration. Our empirical results show that for all countries except Mexico and the U.K., the cointegrating relationship has changed over time; in most cases, the change being towards a lower saving-investment correlation regime. This is perfectly consistent with the recent evidence on international diversification and integration of world capital markets. Finally, we find that while the saving-investment link bears a close relationship with the degree of openness of the country, there seems to be very little evidence in favour of the commonly held view that the correlation varies with the size of the country.

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (56)

Downloads: (external link)
https://doi.org/10.2202/1558-3708.1467 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: Cointegration with Structural Breaks: An Application to the Feldstein-Horioka Puzzle (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:sndecm:v:12:y:2008:i:1:n:3

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/snde/html

DOI: 10.2202/1558-3708.1467

Access Statistics for this article

Studies in Nonlinear Dynamics & Econometrics is currently edited by Bruce Mizrach

More articles in Studies in Nonlinear Dynamics & Econometrics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().

 
Page updated 2025-03-19
Handle: RePEc:bpj:sndecm:v:12:y:2008:i:1:n:3