The Feldstein-Horioka hypothesis revisited

Ratbek Dzhumashev, Arusha Cooray

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Feldstein-Horioka hypothesis states that if there is perfect capital mobility, low correlation between domestic investment and savings should be observed. However, empirical analysis failed to confirm the hypothesis. This study attempts to shed a new light on international capital mobility by incorporating the effect of the fiscal balance and the financial balance. Specifically, for a panel of 161 countries over the 1990-2013 period, the extended model is tested in comparison with the existing models of capital mobility. At the aggregate level, strong support is found for the extended model; while, at the region disaggregated level, compared to the existing models the hypothesis of capital mobility holds for a larger number of regions. Our model and estimates are additionally extended to account for the fact that the above mentioned relationships, are conditional on the country's level of financial development.

Original languageEnglish
Pages (from-to)1-30
Number of pages30
JournalThe B.E. Journal of Macroeconomics
Volume17
Issue number1
DOIs
Publication statusPublished - 1 Jan 2017

Keywords

  • capital mobility
  • Feldstein-Horioka
  • fiscal balance
  • investment
  • saving
  • Shibata-Shintani

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