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The Feldstein-Horioka puzzle and the global financial crisis: Evidence from South Africa using asymmetric cointegation analysis

Andrew Phiri ()

No 1701, Working Papers from Department of Economics, Nelson Mandela University

Abstract: In this study we examine the effects of the 2007-2008 global financial crisis on the Feldstein-Horioka coefficient for South Africa using momentum threshold cointegration and error correction techniques applied to quarterly national savings-investment time series collected between 2000:Q1 and 2017:Q1. Our empirical strategy consists of segregating the data into three samples; one corresponding to the full sample (1960:Q1 – 2016:Q4), another corresponding to the pre-crisis period (1960:Q1-2008:Q3) and the last corresponding to the post-crisis period (2008:Q4-2016:Q4). Our empirical results validate asymmetric cointegration effects for both the full and the pre-crisis periods while only accepting a linear cointegration relation for the post-crisis period. The saving-retention coefficient estimates produced are 0.59 (significant), 0.64 (significant), and 0.22 (insignificant) for the full, pre-crisis and post-crisis periods, respectively. These results imply that international capital mobility has increased in the post-crisis period and this may be primarily due to the effects of a redirection of private capital flows by investors to safe haven assets. Therefore policy plans of further relaxing of capital controls is inadvisable considering that capital is already highly mobile.

Keywords: Investment; Savings; Feldstein-Horioka puzzle; Threshold cointegration; Threshold error correction model; Sub-Saharan Africa; South Africa. (search for similar items in EconPapers)
JEL-codes: C22 C52 F21 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2017-05, Revised 2017-05
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http://repec.mandela.ac.za/RePEc/mnd/wpaper/paper.1701.pdf First version, 2017 (application/pdf)

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