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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, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain) de Marcenado, 27, 28015, Madrid (Spain)

No 2102, Working Papers from Department of Applied Economics II, Universidad de Valencia

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. Specifically, 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 clear in the peripheral, where the financial and sovereign crises have had a more substantial impact. 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 caveats that remain unsolved.

Keywords: Capital mobility; Feldstein-Horioka puzzle; Multiple Structural Breaks; Cointegration, unit roots (search for similar items in EconPapers)
JEL-codes: F36 F45 O16 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-eec, nep-fdg, nep-his and nep-opm
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Working Paper: 50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle (2021) Downloads
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