Abstract
This study investigates the degree of capital mobility in a panel of 16 Latin American and 4 Caribbean countries during 1960 to 2017 against the backdrop of the Feldstein-Horioka hypothesis by applying recent panel data techniques. This is the first study on capital mobility in Latin American and Caribbean countries to employ the recently developed panel data procedure of the dynamic common correlated effects modeling technique of Chudik and Pesaran (J Econ 188:393–420, 2015) and the error-correction testing of Gengenbach, Urbain, and Westerlund (Panel error correction testing with global stochastic trends, 2008, J Appl Econ 31:982–1004, 2016). These approaches address the serious panel data econometric issues of cross-section dependence, slope heterogeneity, nonstationarity, and endogeneity in a multifactor error-structure framework. The empirical findings of this study reveal a low average (mean) savings–retention coefficient for the panel as a whole and for most individual countries, as well as indicating a cointegration relationship between saving and investment ratios. The results indicate that there is a relatively high degree of capital mobility in the Latin American and Caribbean countries in the short run, while the long-run solvency condition is maintained, which is due to reduced frictions in goods and services markets causing increase competition. Increased capital mobility in these countries can promote economic growth and hasten the process of globalization by creating a conducive economic environment for FDI in these countries.
Highlights
Economists and policymakers have been studying the dynamic role of capital mobility in economic growth recently, especially in emerging countries in general and in LatinAmerican and Caribbean countries in particular, which are experiencing large inflows (2020) 6:48 of capital from abroad
They contend that removing the frictions in the goods and services markets reduces considerably the dependence of domestic investment on domestic saving, leading to a greater degree of capital mobility in the observed Feldstein-Horioka puzzle, which is estimated by the following equation: ÀÁ ðI=Y Þit 1⁄4 α þ βit S=Y it þ εit where in the (S/Y) on the (I/Y) is the investment ratio to gross domestic product (GDP) in country i and period t
Once we find that I/Y and S/Y variables are non-stationary in levels, we test whether there is any long-run economic equilibrium relationship between these variables or whether they are cointegrated through cross-sectional dependence
Summary
Economists and policymakers have been studying the dynamic role of capital mobility in economic growth recently, especially in emerging countries in general and in Latin. The Gengenbach et al (2008, 2016) test is the panel error correction estimation and has many advantages over Westerlund’s (2007) method This procedure, based on structural dynamics, allows for cross-sectional dependence, non-stationary common factors, and parameter heterogeneity in a multifactor error structure framework for both the individual countries and the panel. In these tests, the maintained null hypothesis is no cointegration (no error-correction) as opposed to the alternative hypothesis of cointegration or the existence of error-correction, for technical details, see Gengenbach et al (2008, 2016).
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