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Cambridge Journal of Regions, Economy and Society Advance Access originally published online on March 27, 2009
Cambridge Journal of Regions, Economy and Society 2009 2(2):211-227; doi:10.1093/cjres/rsp005
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© The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

This article appears in the following Cambridge Journal of Regions, Economy and Society issue: Spatial Circuits of Global Finance [View the issue table of contents]

International capital mobility: linking the Feldstein–Horioka puzzle to the trade and equity home bias puzzles

Clemens J. M. Kool and Linda M. Keijzer

Utrecht University School of Economics, Janskerkhof 12, 3512 BL Utrecht, the Netherlands. c.j.m.kool{at}uu.nl, l.m.keijzer{at}uu.nl


  Abstract

We revisit the Feldstein–Horioka (FH) puzzle using data for 23 Organisation for Economic Co-operation and Development (OECD) countries for the period 1973–2003. We document a sharp decline in the FH coefficient from the mid-1990s onward, supporting the hypothesis of increased economic and financial integration. Subsequently, we extend the literature and use a non-linear specification with interaction terms to empirically show that observed decreases in equity home bias (EHB) and increases in trade openness are structurally linked to the time variation in the FH coefficient. Thus, this paper empirically establishes a structural link between three puzzles in international macroeconomics and finance: the FH puzzle, the EHB puzzle and the trade home bias puzzle.

Keywords: economic and financial integration, savings–investment correlation, current account imbalances

Received on October 20, 2008. Accepted on February 2, 2009.

JEL Classifications: F21, F32, G15


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