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

Mark J. Holmes, Jesús Otero

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)279-297
Number of pages19
JournalEmpirical Economics
Volume50
Issue number2
DOIs
StatePublished - Mar 1 2016

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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