Developing Countries and the Feldstein-Horioka Puzzle

WP/98/2-EAWP/98/2


.Developing Countries and the Feldstein-Horioka Puzzle.
by Athanasios Vamvakidis and Romain Wacziarg


The previous literature points to a high correlation between domestic rates of
investment and savings among OECD countries. Some take this as evidence of
limited

financial integration in the industrialized world. This paper shows that this
result holds only

for OECD countries and vanishes when any other sample of countries is
considered.


Based on a longer time period (1970-93) and a more recent data set than the
previous

literature, we show that when we analyze different samples that include low.and


middle.income countries the strong positive correlation between domestic
investment and

domestic savings no longer holds. The correlation coefficient in a regression
of the rate of

domestic investment on the rate of domestic savings is statistically
insignificant most of the

time and generally smaller than 0.3 for any sample other than the OECD. This
finding is

robust with respect to alternative time periods, subsamples, and estimation
methods.


Finally, we estimate a fixed effects regression using panel data (previous
literature has

focused only on cross-country regressions), which also shows a very high
correlation of

domestic investment and domestic saving for OECD economies and a very low one
for any

other sample of countries.