The Feldstein-Horioka Test of International Capital Mobility: Is it Feasible?

September 1, 1996

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W. J. Jansen The Feldstein-Horioka Test of International Capital Mobility: Is it Feasible?, (USA: International Monetary Fund, 1996) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Feldstein and Horioka (1980) argued that the correlation of saving and investment in a cross-section of countries may provide a test of global capital mobility. This paper argues that neither the long-run nor the short-run correlation can serve as a reliable basis for such a test. The intertemporal budget constraint implies that each country’s saving and investment should be cointegrated over time. Simulations show that the cross-section regressions used in the literature will produce correlations that strongly tend towards one, regardless of the degree of capital mobility. Although the short-run correlation is not affected by the intertemporal budget constraint, the empirical analysis shows it is primarily a country-specific business cycle fact.

Subject: Balance of payments, Budget planning and preparation, Business cycles, Capital markets, Current account, Economic growth, Financial markets, Public financial management (PFM)

Keywords: Budget planning and preparation, Business cycle, Business cycles, Capital markets, Capital mobility, Current account, Global, Investment rate, Regression equation, Saving-investment correlation, Time series, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/100
Stock No:

WPIEA1001996
ISBN:

9781451852356
ISSN:

1018-5941

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