50 Years of Capital Mobility in the Eurozone: Breaking the Feldstein-Horioka Puzzle

Mariam Camarero, Alejandro Muñoz and Cecilio Tamarit
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Alejandro Muñoz: University of València

Open Economies Review, 2021, vol. 32, issue 5, No 3, 867-905

Abstract: Abstract This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Precisely, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so evident in the peripheral, where the financial and sovereign crises have had a more substantial impact. In addition, our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some flaws that remain unsolved.

Keywords: Capital mobility; Feldstein-horioka puzzle; Multiple structural breaks; Cointegration; Unit roots; F36; F45; O16 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Working Paper: 50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle (2021)
Working Paper: 50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle (2021)
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DOI: 10.1007/s11079-021-09655-1

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