Macro fundamentals and the resurgence of the Feldstein–Horioka puzzle in Europe

António Martins

Journal of International Financial Markets, Institutions and Money, 2024, vol. 93, issue C

Abstract: This paper discusses the resurgence of the Feldstein–Horioka puzzle after the global financial crisis within the European space. Revisiting the theory of intertemporal choice, this paper suggests that the deterioration of macroeconomic fundamentals that favor capital flows from richer to poorer economies can lead investment and savings to correlate across countries even without frictions to capital mobility. I test this hypothesis against a data set of 12 European economies spanning since the inception of the Maastricht treaty and ending immediately before the start of the Covid-19 pandemic. I find that the investment-savings correlation is generally low both across and within open economies, aligning with the theoretical stylized fact. However, this can be jeopardized when low-income economies accumulate large net stocks of foreign liabilities coupled with sluggish prospects for productivity growth. Ultimately, if investment and savings are not managed in line with macro fundamentals, foreign investors eventually impose a premium on new liabilities, raising the cost of financing investment with foreign funds and leading the correlation between investment and savings to rise both across and within countries.

Keywords: Capital mobility; Feldstein–Horioka puzzle; Open economies; Current account (search for similar items in EconPapers)
JEL-codes: E22 F15 F21 F32 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:93:y:2024:i:c:s1042443124000726

DOI: 10.1016/j.intfin.2024.102006

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