Abstract
It is well known that one of the important aspects of achieving sustainable development is to preserve macroeconomic stability, which is closely related to the extent of capital mobility. Given the importance of the subject for open economies, this paper examines the degree of capital mobility for African countries by using among other methodologies the Feldstein- Horioka coefficients. To determine those coefficients, we use time series data and methods, along with the Dynamic Heterogeneous panel approach. We find significant cross-country heterogeneity in the dynamic of income per capita, investment rate, and saving rate; and conclude that it is invalid to pool data across our sample countries. Furthemore, the empirical findings reveal that for African countries included in the sample, the estimated saving retention coefficients are at the same time, small and high indicating respectively higher and lower degrees of capital mobility and therefore, challenging the results of Feldstein – Horioka on developing countries.
Highlights
It is quite important to sustain macroeconomic stability, which is closely related to the extent of capital mobility allowed by an economy
While higher capital mobility was encountered as one of the reasons behind the recent worldwide financial crisis, the subject is important for policy and firms for a number of reasons; (i) the effectiveness of macroeconomic policies is closely related to the degree of international capital mobility; (ii) higher international capital mobility helps firms to allocate resources efficiently and achieve risk diversification; (iii) higher international capital mobility may increase volatility which may end up with financial crisis
The panel tests of Im et al (1995) have higher power than individual, pair wise tests and the general conclusion is that the current account is a stationary series in both in developing and OECD countries
Summary
It is quite important to sustain macroeconomic stability, which is closely related to the extent of capital mobility allowed by an economy. The presence of capital mobility is tested alternatively by using the saving-investment correlation, interest parity condition, and the consumption – smoothing approach to the current account. Contrary to the maintained assumption that in the developed countries, which are generally open-economies and where capital is highly mobile, Feldstein-Horioka (1980) presented econometric evidence showing that in a cross-section consisting of 16 OECD countries for the period 1960-1974, saving and investment are highly correlated indicating that capital is not mobile. This finding is known as the Feldstein- Horioka (F-H) Puzzle. In compliance with the interpretation www.ccsenet.org/ijbm made by F-H, small coefficients will be seen as high capital mobility
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