The Feldstein-Horioka Hypothesis: Co-Integration and Causality Results for Selected Countries

The Feldstein-Horioka Hypothesis: Co-Integration and Causality Results for Selected Countries

Author(s) by Santiago Grullon
Pages 134-142
Keywords Feldstein-Horioka hypothesis, domestic savings, domestic investment, ‘bounds’ test for co-integration, Granger Pairwise causality
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Abstract


This study investigates the validity of the Feldstein-Horioka hypothesis, which suggests that with perfect world capital mobility there should be no correlation between domestic savings and domestic investment, for the Bahamas, Belize, Bolivia, Nicaragua, and Panama. Results from ‘bounds’ test for co-integration for all five countries confirm the presence of a long-run association between domestic savings rates and domestic investment rates, and thus failing to support the Feldstein-Horioka theory. However, Pairwise Granger tests for the first four countries do not show any causal linkages between domestic savings and domestic investment and in the case of Panama the evidence shows bi-directional causality between the two variables.

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