Capital mobility in the Caucasus

Rustam Jamilov

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the degree of capital mobility in the countries of the Caucasus. We employ a simple model developed in the seminal paper by Feldstein and Horioka (1980). First, we estimate the model using conventional time-series econometrics in order to capture the short-run dynamics. Then, we construct a panel of 6 countries of the Caucasus – Azerbaijan, Armenia, Georgia, Kazakhstan, Russia, and Turkey – and obtain the long-run estimates by applying a panel cointegration approach. To that end, we make use of the fully modified ordinary least squares (FMOLS) estimation method for heterogeneous panels, developed by Pedroni (2000). We estimate the long-run saving retention ratio to be quite high, showing that capital mobility in the Caucasus is considerably low. In addition, we also look at the country ratings of the Index of Economic Freedom to compare our results with the official rankings in market openness. We also put our findings in an international context, and confirm that Caucasus is relatively financially restrained. Finally, we discuss the implications of our results for the region's policy-relevant issues such as financial integration, human capital mobility, across-border trading, fiscal and monetary policy, exchange rate volatility, solvency management, responsive consumption smoothing, and recession resistance.

Keywords: Capital mobility; Feldstein-Horioka regression; Caucasus; Saving-investment correlation; Time-series; FMOLS panel cointegration (search for similar items in EconPapers)
JEL-codes: F3 F31 F32 (search for similar items in EconPapers)
Date: 2012-02, Revised 2012-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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