The Feldstein-Horioka Test of International Capital Mobility: Is it Feasible?
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:
Balance of payments Budget planning and preparation Business cycles Capital markets Current account Economic growth Financial markets Public financial management (PFM)
English
Publication Date:
September 1, 1996
ISBN/ISSN:
9781451852356/1018-5941
Stock No:
WPIEA1001996
Pages:
30
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