Is the Feldstein-Horioka Puzzle Really a Puzzle?

Daniel Levy ()

International Finance from University Library of Munich, Germany

Abstract: Using the framework of a dynamic intertemporal optimization model of an open economy, it is shown that the long-run investment-saving correlation follows directly from the economy's dynamic budget constraint and this does not depend on the degree of international capital mobility. Therefore, unless the budget constraint is violated, the time series of investment and saving should be cointegrated, and this should be true for any degree of capital mobility. Using an improved econometric technique, which encompasses the tests used by previous authors and avoids some of the pitfalls associated with their tests, I show that their conflicting findings can be explained by a simple but important, omitted variables problem. Using annual and quarterly post-war U.S. data, I find that investment and saving are cointegrated in levels as well as in rates, regardless of the time period considered, as predicted by the model.

Keywords: Capital Mobility; Investment-Saving Correlation; Dynamic Budget Constraint; Integration; Cointegration; Omitted Variables in Cointegration; International Capital Mobility; Long-Term Capital Mobility; Feldstein-Horioka Puzzle; Investment-Saving Comovement; Investment-Saving Cointegration; Intertemporal Optimization (search for similar items in EconPapers)
JEL-codes: C32 C50 F02 F21 F32 F41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-02-07, Revised 2005-05-12
New Economics Papers: this item is included in nep-dge
Note: Type of Document - pdf; prepared on Win 98; to print on Any printer; pages: 33 ; figures: Figures are included
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Is the Feldstein-Horioka Puzzle Really a Puzzle? (2004)
Working Paper: Is the Feldstein-Horioka Puzzle Really a Puzzle? (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0402002

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