Current Account Solvency and the Feldstein--Horioka Puzzle

Jerry Coakley · Farida Kulasi · Ron P Smith

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Abstract

In this paper we suggest an alternative explanation of the high cross-section association between shares of saving and investment in GDP which Feldstein and Horioka (1980) interpret as evidence of low capital mobility. In OECD countries, saving and investment shares appear to be I(I). We show that a solvency constraint implies that the current balance is stationary and thus that saving and investment cointegrate with a unit coefficient irrespective of the degree of capital mobility. It is this long-run relation that the FH cross-section regression captures. Econometric results for 23 OECD countries over the 1960-92 period are consistent with this explanation.

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2000Nonstationary panel data analysis: an overview of some recent developments 2006Testing for Panel Cointegration with Multiple Structural Breaks*1998The Feldstein-Horioka puzzle and capital mobility: a review 2005Unobserved heterogeneity in panel time series models 2005Dynamic Seemingly Unrelated Cointegrating Regressions 2009A survey of the Feldstein–Horioka puzzle: What has been done and where we stand 2010CAPITAL MOBILITY AND CAPITAL TAX COMPETITION 2004Is the Feldstein–Horioka Puzzle History?

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