The Role of Remittences in the Explanation of Feldstein-Horioka Paradox: Evidence from Transition Economies

Merima Balavac

Economic Research-Ekonomska Istraživanja, 2011, vol. 24, issue 4, 91-106

Abstract: We measure the level of capital mobility following Feldstein and Horioka (1980) who assume that measuring the extent to which national saving and investment rates are correlated indicate the degree of financial integration into the world economy. While they surprisingly found the high positive correlation between saving and investment in developed OECD economies, subsequent empirical studies on the sample of less developed economies found smaller saving-investment correlation. Concentrating on the determinants of investments in the transition economies that could explain now conventional, puzzling Feldstein-Horioka results for transition economies, we were the first who consider remittances as possible explanation. The results of panel analysis seem to support the hypothesis of capital mobility among the economies in transition for the period 1995-2007. Highly significant effect of remittances on investment supports our argument that a significant portion of received remittances is directed toward investment in transition economies.

Date: 2011
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DOI: 10.1080/1331677X.2011.11517483

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