International Capital Mobility Research Articles

A pairwise-based approach to examining the Feldstein–Horioka condition of international capital mobility

We propose a pairwise procedure to test the Feldstein–Horioka condition of capital mobility. In contrast to the existing approach, we explicitly examine the relationship between domestic investment and foreign savings rather than domestic savings. In terms of addressing the Feldstein–Horioka puzzle, our results based on a panel of OECD and emerging market economies initially suggest that the depth and extent of capital mobility remain generally limited and that mobility has increased over the past 20 years. However, in contrast to existing studies, we find that capital mobility between Euro and EU pairs is more extensive than between pairs that involve other countries. If our sample is expanded to include emerging markets, we find that capital mobility has also increased though is weaker than for OECD economies. We provide additional insight in terms of consistency between our assessment of capital mobility based on the Feldstein–Horioka condition (a quantity approach) and a price approach based on real interest rate differentials.

Health Care Quality and Finite Changes of Trade Policy

This article attempts to relate the issues of health care quality with international trade. For this purpose we have mixed both flavours of Heckscher-Ohlin-Samuelson and Neo-Heckscher-Ohlin frameworks and have developed a hybrid type of trade theoretic general equilibrium model. In such a set-up we have shown that a movement from a regime of international health capital immobility to a regime of international health capital mobility may lead to an expansion of the size of the health quality exporting sector and at the same time such type of regime switch may lead to a contraction of quality of this health care sector. Moreover, from the hybrid model we have illustrated that the sizes of health care and composite export sector expand, whereas import sector of our small open economy contracts.

ULUSLARARASI SERMAYE AKIMLARININ KONTROLÜ VE AVRUPA BİRLİĞİ’NİN KONUYA YAKLAŞIMI HAKKINDA BİR İNCELEME

In 1973, the United States of America, Germany, Canada, Switzerland and Holland and then, in 1979, Japan and England abolished the controls on their capital accounts. Thus, a financial liberalization movement emerged initially in the developed countries. Developing countries such as Turkey, Mexico, Argentina, Indonesia, Thailand, Malaysia joined the financial liberalization movement in 1980s hoping to raise external capital for the domestic investments. In the end, numerous countries discarded in the last forty years the regulations that could hinder the mobility of international capital. It is known that international organizations such as IMF and the World Bank had a consensus view on the need for increasing the mobility of international capital until recent past. However, from a theoretical standpoint, views for managing international capital flows always existed in the economics literature along with the views advocating perfect capital mobility. In the aftermath of the global financial collapse which hit the advanced economic centers such as the United States and the Euro Area in 2008, number of the advocates of perfect capital mobility - including the IMF and the World Bank decreased and the view that management of capital flows might result in better ends became the dominanting view. In this context, a similar intellectual tendency emerged in the European Union and some practices came into effect. This article summarizes the literature on capital movements along with various methods of capital controls and reviews the discussions and implementations within the European Union regarding the capital controls.

International Capital Mobility and Saving-Investment Nexus in Nigeria: Revisiting Feldstein-Horioka Hypothesis

This paper tests the validity of Feldstein-Horioka (1980) hypothesis using Nigerian data from 1980 to 2013 by relying on the ARDL Bounds testing approach to co-integration and vector error correction model (VECM). Evidence for the hypothesis over the sub-samples is mixed given absence of co-integrating relationship between savings and investment in both periods. Over the period of market-friendly economic reform (1986 -2013) and entire sample period (1980-2013), we found low saving investment correlation indicating support for the F-H hypothesis (that low saving investment relationship implies high degree of international capital mobility). Presumably, the World Bank and IMF designed economic reform programs in form of liberalization and deregulation – coupled with the neo-liberal economic management framework that Nigeria is currently practicing – may have attenuated the saving investment relation in the reform era, thereby providing support for F-H hypothesis over the reform era. But the finding of similar absence of cointegration between saving and investment in the pre-reform era, against the F-H postulate, reveals the importance of incorporating factors such as money supply and inflow of foreign capital that could affect the saving investment relationship as widely suggested in the literature. Overall, we find support for high degree of international capital mobility across Nigerian borders that may lead to unsustainable current account balance for the economy if left unregulated. The policy import of the paper is the need for a more conscientious implementation of a policy of guided deregulation of Nigeria’s capital and trade accounts.

Oil Production Rehabilitation, Fiscal Policy and Economic Development in Libya: A Future View

This paper develops and simulates a dynamic general equilibrium macroeconomic model to analyze the likely impact of oil production and revenue rehabilitation on the Libyan economy, under different government fiscal policy responses. The model is ideally appropriate to analyze macroeconomic issues in oil-producing developing countries. In particular, it is capable of incorporating alternative government policy responses toward the allocation of the oil revenue either upon consumption spending or development spending in the form of government investment spending upon infrastructure, human capital formation and technology acquisition in non-oil production. It is also capable of incorporating different degrees of international capital mobility and other features that characterize oil-producing developing countries. We distinguish between the short-run and long-run impact of the oil production recovery upon the real exchange rate, price level, the non-oil trade balance, foreign assets, physical capital stock, human capital stock, imported capital stock and non-oil production. Based on recent development of oil production in Libya the paper finds that fiscal policy responses exert a crucial impact on the macroeconomic adjustment process. In particular, the implementation of a development oriented policy in the form of increased government expenditure upon infrastructure, human capital formation, and technological acquisition can transform the economy into a well-equipped one able to diversify and build a viable non-oil economy, and, therefore, to maintain and improve its competitive advantages. This eventually will result in noticeably improved economic outcomes and overall development of the economy.

Feldstein-Horioka Puzzle and International Capital Mobility in High Income Countries: A Pool Mean Group Approach

This paper reexamines the status of international capital mobility under the Feldstein-Horioka (1980) hypothesis by comparing the results from the OECD and non-OECD high income categories. Data on savings and investment ratios of 21 OECD and 17 non-OECD countries were analyzed using the dynamic heterogeneous panel estimators of Pooled Mean Group (PMG), Mean Group (MG) and Dynamic Fixed Effects (DFE). Based on the series of Hausman post-estimation test, result from the PMG is upheld. The saving-retention coefficient, showing the level of international capital mobility, reads 0.89, 0.93 and 0.16 for the high-income group, OECD category and non-OECD category respectively. This suggests lower capital mobility in high-income as a whole and OECD countries, and higher capital mobility in the non-OECD countries. The contradictory findings confirmed that the Feldstein-Horioka saving-retention coefficient is unlikely, a viable option of measuring cross-border capital mobility. Further researches therefore need to re-observe the qualification of saving-retention coefficient in explaining international capital mobility. DOI: http://dx.doi.org/10.5755/j01.ee.25.5.3539

International Capital Mobility and Saving-Investment Relationship in the Newly Industrialized Countries

This paper investigates the Feldstein-Horioka coefficients and evaluates the degree of international capital mobility for ten newly industrialized countries (NICs) over the different sub-periods from 1970 to 2010. By applying the Pedroni and Westerlund cointegration tests, we find that saving and investment are indeed cointegrated. The estimated FH coefficients using FMOLS and DOLS are 0.24 and 0.33, respectively, for the period 1970–1980. Furthermore, the estimated FH coefficients reduce from 0.80 (FMOLS) in 1991–2000 to 0.36 (FMOLS) in 1970–1980. The small FH coefficients suggest that international capital mobility increased in the NICs during the sub-periods 1970–1980 and 2001–2010.

Tax policy and present-biased preferences: Paternalism under international capital mobility

This paper deals with tax-policy responses to quasi-hyperbolic discounting. Earlier research on optimal paternalism typically abstracts from capital mobility. If capital is mobile between countries, it may no longer be possible for national governments to control domestic savings via capital taxation (as in a closed economy). In this paper, we take a broad perspective on public policy responses to self-control problems by showing how these responses vary (i) between closed and open economies, (ii) between small open and large open economies, and (iii) depending on whether or not both source based and residence based capital taxes can be used.

Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model.

Re-examining the Feldstein–Horioka and Sachs' views of capital mobility: A heterogeneous panel setup

We re-examine two complementary views of international capital mobility using data for 25 OECD countries over the period 1970–2011. Estimation of the original Feldstein–Horioka and Sachs' equations provides mixed evidence of capital mobility, though we do not detect a significant bias towards finding in favour of capital immobility in using time-averaged data. However, potential bias in cross-sectional estimation motivates us to examine the data as a heterogeneous panel which allows us to control for the effects of cross-sectional dependence and endogeneity. In addressing the Feldstein–Horioka puzzle, application of the CCEMG estimator of Pesaran (2006) to the Feldstein–Horioka and Sachs' equations points towards greater (though not perfect) capital mobility than hitherto found.

L'autonomie de la Banque de France de la Grande Guerre à la loi du 4 août 1993

Cet article propose une mise en perspective de l’histoire de l’autonomie de la Banque de France au xxe siecle afin de faire ressortir la tradition d’un fort interventionnisme gouvernemental dans les affaires de la Banque de France, les tergiversations et les resistances qui ont empeche de faire evoluer la loi de janvier 1973, et ainsi de mieux mesurer la rupture que constitue la loi d’aout 1993 sur l’independance de la Banque de France.Classification JEL : G20, N14.

Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

Summary We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption—an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.

An Analysis of the Implications of International Capital Mobility on the Keynesian Welfare State

An Analysis of the Implications of International Capital Mobility on the Keynesian Welfare State

Trade Structure and Growth Effects of Taxation in a Two-Country World

This paper explores the long-run impacts of tax policy in a two-country model of endogenous growth with variable labor supply. We focus on international spillover effects of tax reforms under alternative trade structures. It is shown that if the instantaneous utility function of the representative family in each country is additively separable and if international capital mobility is absent, then a change in taxation in one country does not directly affect capital formation in the other country. Such a conclusion is fundamentally modified if international borrowing and lending are allowed. Due to free financial flows, a change in tax policy in one country directly diffuses to the growth performance of the other country, even though preference structures are assumed to be log-additive forms.

Trade in Health Services in the Presence of Consumption Efficiency Hypothesis

An attempt has been made in this paper to formulate a three-sector general equilibrium model where two sectors produce final traded goods whereas a third sector produces a non-traded final good. It has been referred to the third sector as a non-traded final good producing health sector. In such a set up it has been shown that a movement from a regime of international health capital immobility to a regime of international health capital mobility may lead to an expansion of the health sector in the presence of nutritional efficiency of workers. Apart from that it has also been shown that social welfare of our stylized small open economy will improve.

Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.

Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.

Does economic integration stimulate capital mobility? An analysis of four regional economic communities in Africa

It is well known that high levels of regional integration enable portfolio risk diversification and capital mobility. While there have been a number of empirical attempts to verify the presence of capital mobility using the Feldstein–Horioka (FH) approach, none of them to the best of our knowledge have explicitly examined capital mobility changes across regional economic groupings in Africa, analyzing sub-samples to compare effects of pre-versus post integration. Filling this gap in the literature, this paper analyzes how some major regional economic integration initiatives, such as SACU (South African Customs Union), UEMOA (West African Economic and Monetary Union), COMESA (Common Market for Eastern and Southern Africa) and ECOWAS (Economic Community of West African States)) have influenced capital mobility in their member countries. To estimate the investment and savings relationship, we use Pedroni's (2004) fully modified ordinary least squares (FMOLS) panel cointegration method, applying to a sample of 25 African countries for which annual data is available from 1960 to 2009. To assess robustness of our results, we also employ the fixed effects, random effects and Mark and Sul's (2003) dynamic OLS (DOLS) methods. Our findings suggest that international capital mobility has only slightly increased in the African countries due to these agreements.

Does size asymmetry exacerbate the inefficiency of tax competition?

Many authors demonstrate that the tax gap resulting from tax competition increases with the size asymmetry of the competing countries. Consequently, increasing country-size disparities exacerbates the inefficiency of tax competition. The aim of this note is to show that this classical view has no general validity, if we consider that countries compete not only in taxes, but also in the provision of infrastructure. The simple model we develop for this purpose demonstrates that the effect of size disparity on efficiency depends crucially on the degree of international capital mobility.

Does Size Asymmetry Exacerbate the Inefficiency of Tax Competition?

Many authors demonstrate that the tax gap resulting from tax competition increases with the size asymmetry of the competing countries. Consequently, increasing country-size disparities exacerbates the inefficiency of tax competition. The aim of this note is to show that this classical view has no general validity if we consider that countries compete not only in taxes but also in the provision of infrastructure. The simple model we develop for this purpose demonstrates that the effect of size disparity on efficiency depends crucially on the degree of international capital mobility.