Developing Countries and the Feldstein-Horioka Puzzle

IMF Working Papers, January 1, 1998

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Developing Countries and the Feldstein-Horioka Puzzle

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Bibliographic details

• Authors: Romain Wacziarg, Athanasios Vamvakidis
• Published: January 1, 1998
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451841732.001

Summary and main findings

• Previous literature finds a high correlation between domestic rates of investment and savings among OECD countries; this has been interpreted as evidence of limited financial integration in the industrialized world.
• Using an extended sample of countries, the paper finds that 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.
• For any sample other than the OECD, the correlation coefficient is generally smaller than 0.3.
• The result is robust across alternative time periods, subsamples, and estimation methods.

Methodology and robustness checks

• Empirical regression of domestic investment rate on domestic savings rate.
• Controls included:
  • Measurement error.
  • Business cycle effects.
  • Country-specific fixed effects.
• Robustness assessed with respect to:
  • Alternative time periods.
  • Different subsamples.
  • Alternative estimation methods.

Policy-relevant interpretation

• The weak or insignificant correlation between domestic savings and investment outside the OECD implies greater international capital mobility for many developing countries than suggested by the original Feldstein-Horioka observation confined to OECD countries.
• Results bear on debates over financial integration and the degree to which domestic savings constrain domestic investment in developing and emerging markets.

Subjects and keywords

• Subjects: Balance of payments, Capital inflows, Domestic savings, Financial integration, Financial services, Income, Interest rate parity, National accounts, Population and demographics, Population growth
• Keywords: Capital inflows, developing country, Domestic savings, emerging markets, Feldstein, Feldstein-Horioka result, Financial integration, Income, Interest rate parity, investment rate, OECD country, Population growth, retention coefficient, saving rate, saving share, WP

Source: IMF Working Papers, "Developing Countries and the Feldstein-Horioka Puzzle" by Romain Wacziarg and Athanasios Vamvakidis, January 1, 1998.

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• Developing Countries and the Feldstein-Horioka Puzzle -WP/98/2
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