Type: Working Paper
A New Look at the Feldstein-Horioka Puzzle using an Integrated Panel
Working Paper, CEPII Discussion Paper, 22
BANERJEE, Anindya, ZANGHIERI, Paolo, A New Look at the Feldstein-Horioka Puzzle using an Integrated Panel, CEPII Discussion Paper, 22 - https://hdl.handle.net/1814/4430
Retrieved from Cadmus, EUI Research Repository
We use a panel of 14 European countries to take a fresh look at the so-called Feldstein-Horioka puzzle on the high correlations between savings and investment observed within countries. A large literature has emerged to investigate this issue, using both individual country-by-country data and panels constructed by pooling data from several countries although the answers remain by and large elusive. Since we argue that the savings and investment series in our panel are integrated of order one, we use the recently developed theory of panel unit roots and cointegration to look at the relationship between savings and investment. Our particular contributions are (a) to consider the puzzle comprehensively, using both time series and panel methods for integrated series; (b) to consider subsets of countries in the panel; and (c) to apply tests of the hypothesis to various disaggregates and transformations of the core datasets, with our particular interest centering on the implications for fiscal policy. We also interpret the findings of our tests in the light of the likely presence of cross-country cointegration (which is known to affect the properties of the tests for unit roots and cointegration.
Cadmus permanent link: https://hdl.handle.net/1814/4430
Series/Number: CEPII Discussion Paper; 22
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