The Feldstein-Horioka Test of International Capital Mobility: Is it Feasible?

W. Jos Jansen

No 1996/100, IMF Working Papers from International Monetary Fund

Abstract: Feldstein and Horioka (1980) argued that the correlation of saving and investment in a cross-section of countries may provide a test of global capital mobility. This paper argues that neither the long-run nor the short-run correlation can serve as a reliable basis for such a test. The intertemporal budget constraint implies that each country’s saving and investment should be cointegrated over time. Simulations show that the cross-section regressions used in the literature will produce correlations that strongly tend towards one, regardless of the degree of capital mobility. Although the short-run correlation is not affected by the intertemporal budget constraint, the empirical analysis shows it is primarily a country-specific business cycle fact.

Keywords: WP; time series; business cycle; capital mobility; investment rate; saving-investment correlation; regression equation; Current account; Budget planning and preparation; Business cycles; Capital markets; Global (search for similar items in EconPapers)
Pages: 30
Date: 1996-09-01
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Citations: View citations in EconPapers (11)

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