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

Author/Editor:

W. J. Jansen

Publication Date:

September 1, 1996

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.

Series:

Working Paper No. 1996/100

Subject:

English

Publication Date:

September 1, 1996

ISBN/ISSN:

9781451852356/1018-5941

Stock No:

WPIEA1001996

Pages:

30

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