Empirical Investigation on the Determinants of the Saving- Investment Interaction

Timur Gur, Lutfi Erden () and Ibrahim Ozkan ()

Panoeconomicus, 2011, vol. 58, issue 3, 343-353

Abstract: This study aims to shed light on the Feldstein-Horioka (F-H) puzzle, making use of the potential explanations put forward in the related literature. To this end, the study takes a distinct empirical route, combining a cointegration technique and regression analysis. In the first step, we obtain three definitions for the dependent variable that represent the degree of the interaction between domestic saving and investment (S-I), employing a cointegration analysis for 86 countries in the sample. In the second step, each definition of the dependent variable is regressed on potential explanations for the co-movement of the S-I such as openness, country size, productivity shocks, and real interest rate differentials. After examining a number of potential variables for their explanatory power on this puzzle, however, none of the posited variables are found to be statistically significant determinants of the S-I interaction. The results indicate that the size of the economy, productivity shocks or interest rate differentials have almost no role in explaining the S-I behavior. Further, the findings show that openness has no influence on the S-I interaction, suggesting that it is not plausible to view the S-I correlation as an indicator of international capital mobility as F-H did. Key words: Feldstein-Horioka puzzle, Saving-Investment relations, International capital mobility, Cointegration.JEL: E20, C32.

Keywords: Feldstein-Horioka puzzle; Saving-Investment relations; International capital mobility; Cointegration (search for similar items in EconPapers)
Date: 2011
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