Saving-Investment Nexus and International Capital Mobility in India: Revisiting Feldstein-Horioka Hypothesis

Jeevan Khundrakpam and Rajiv Ranjan ()
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Rajiv Ranjan: Reserve Bank of India, Postal: Department of Economic Analysis and Policy,, Reserve Bank of India, Mumbai, India

Indian Economic Review, 2010, vol. 45, issue 1, 49-66

Abstract: The paper employing ARDL cointegration approach examined the Feldstein-Horioka (FH)(1980) postulate on international capital mobility for India during 1950-51 to 1990-1991 and during 1950-51 to 2006-07. It finds a robust long-run cointegrating relationship between saving and investment rates in India with the former explaining the latter without any feedback, implying lower degree of international capital mobility. Conforming to the F-H hypothesis, the relationship between saving and investment rates was found to be weaker with the inclusion of post-reform period, characterized by a more liberalized regime on capital flows, than during the pre-reform period. In the short-run also the relationship between saving and investment rates was found to be strong, indicating the influence of temporary shocks emanating from business cycle. That the long-run equilibrium relationship between saving and investment rates could not be statistically distinguished from one imply a sustainable current account balance in India.

Keywords: Saving; Investment; Cointegration; ARDL (search for similar items in EconPapers)
JEL-codes: C22 E21 (search for similar items in EconPapers)
Date: 2010
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