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Capital mobility in the panel GMM framework: Evidence from EU members

Ketenci, Natalya (2014): Capital mobility in the panel GMM framework: Evidence from EU members.

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Abstract

This paper examines the level of capital mobility in European Union members using the generalized method of moments (GMM) estimation technique developed by Hansen (1982). This study investigates the validity of the Feldstein-Horioka puzzle within the GMM framework and the impact of the global financial crisis on the level of capital mobility in EU members. In general, the world countries with time have a tendency to a higher level of capital market openness. According to Feldstein and Horioka (1980), a higher saving-investment correlation is related to lower capital mobility. In this paper, panel data for 27 European countries were used for the period of 1995-2013 on the quarterly basis. The empirical results provide evidence of high capital mobility in EU members, obtaining a low value of a saving retention coefficient. The results of estimations indicate significant dependence of investments on its past values. It is found that the global financial crisis had a deeply negative impact on investment rates during the first three quarters of 2008, followed by a recovery in the last quarter. The empirical results indicate that the level of capital mobility increased in the first three quarters and decreased in the fourth quarter of 2008 compared to estimations without dummies. Thus increase in investments and decrease in the international capital mobility level of European countries in the last quarter of 2008 indicate a relative increase in domestic capital flows, taking into account high risk in the international market.

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