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The Feldstein-Horioka puzzle and capital mobility: The role of the recent financial crisis

Boris But and Bruce Morley

Economic Systems, 2017, vol. 41, issue 1, 139-150

Abstract: The Feldstein-Horioka (FH) puzzle has long been debated as it relates to the important topics of capital mobility and how to determine levels of investment. Adopting a recursive approach and panel techniques, this paper explores the impacts of the recent financial crisis on the validity of the puzzle. The OECD’s saving-investment correlation dropped to a record low just before the 2008 crisis began, reflecting the perceived ‘end’ of the FH puzzle in some studies. But since the onset of the crisis, our results indicate that this correlation has increased, suggesting the puzzle’s return. The puzzle for net capital-importing and net capital-exporting countries differs, with the relationship being more significant for the exporters compared to the importers, reflecting the asymmetry in terms of the degree of shocks across countries.

Keywords: Feldstein-Horioka puzzle; Capital mobility; Financial crisis (search for similar items in EconPapers)
JEL-codes: C23 F21 F32 F38 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecosys:v:41:y:2017:i:1:p:139-150