This study aims to shed light on the Feldstein-Horioka (F-H) puzzle, making
use of the potential explanations put forward in the related literature. To
this end, the study takes a distinct empirical route, combining a
cointegration technique and regression analysis. In the first step, we obtain
three definitions for the dependent variable that represent the degree of the
interaction between domestic saving and investment (S-I), employing a
cointegration analysis for 86 countries in the sample. In the second step,
each definition of the dependent variable is regressed on potential
explanations for the co-movement of the S-I such as openness, country size,
productivity shocks, and real interest rate differentials. After examining a
number of potential variables for their explanatory power on this puzzle,
however, none of the posited variables are found to be statistically
significant determinants of the S-I interaction. The results indicate that
the size of the economy, productivity shocks or interest rate differentials
have almost no role in explaining the S-I behavior. Further, the findings
show that openness has no influence on the S-I interaction, suggesting that
it is not plausible to view the S-I correlation as an indicator of
international capital mobility as F-H did.
An empirical investigation on the determinants of the saving-investment interaction
