## Developing Countries and the Feldstein-Horioka Puzzle

_IMF Working Papers, January 1, 1998_

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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

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### 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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