AN ASSESSMENT OF THE FELDSTEIN–HORIOKA PUZZLE FOR INDIA: A MARKOV REGIME SWITCHING APPROACH

Archana Kulkarni () and Rajendra N. Paramanik
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Archana Kulkarni: Patna 801106, Bihar, India
Rajendra N. Paramanik: Faculty of Economics and Finance, Department of HSS, IIT Patna, Patna 801106, Bihar, India

The Singapore Economic Review (SER), 2025, vol. 70, issue 06, 1625-1644

Abstract: The study aims to examine the Feldstein–Horioka puzzle in the Indian context during 2002Q2 to 2019Q4 to unearth nonlinear patterns in the data. Findings from an augmented Markov regime-switching model reveal two distinct, yet random regimes for correlations between savings and investment-GDP ratios, with higher correlation between the variables persisting for a longer duration. In the low correlation regime, trade-related factors, policy uncertainty and global shocks have a significant impact on the correlation. Fiscal shocks and trade costs explain high correlations in regime 2, while global shocks act to decrease the correlation in this regime. The high correlation regime dominates the study period and indicates that the Feldstein–Horioka puzzle of limited capital mobility persists in India. Economic agents appear to respond rapidly to changing domestic and global policy conditions, besides being affected by incomplete integration of goods markets, explaining the pattern of correlations.

Keywords: Feldstein–Horioka puzzle; Markov switching; capital mobility; trade cost; savings investment (search for similar items in EconPapers)
JEL-codes: C22 C24 E21 E22 F32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S0217590824500073

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