The Feldstein-Horioka Puzzle Reconsidered for OECD Countries

Abstract

This paper investigates the savings-investment relationship, also known as the Feldstein-Horioka puzzle, for a panel of 30 OECD countries over 1960-2006. It utilizes the recently-developed panel cointegration techniques to test and estimate the long-run equilibrium relationship between savings and investment. Investment and savings rates are found to have unit roots and to be cointegrated, based on 5 different panel unit root tests and 3 types of panel cointegration tests. The estimated coefficients on the savings rate employing CCR, DOLS, and FMOLS techniques, exhibit a declining trend over subsample periods. It suggests that international capital mobility in the OECD economies almost quadrupled over 1960-2006 and substantially increased in the 1990s and 2000s. Moreover, the magnitude of the estimated saving-retention coefficients is much smaller than those reported by Feldstein and Horioka, who did not consider the nonstationarity of data and the resulting spurious regression problem. We also find that 21 original OECD members had a much greater increasing trend in capital mobility than 9 developing new members over 1990-2006, presenting evidence against the scale effect of country size. The empirical findings in this paper provide strong evidence against the Feldstein-Horioka puzzle in OECD countries over 1960-2006.