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On the Sources of the Feldstein-Horioka Puzzle across Time and Frequencies

Ko, Jun-Hyung and Funashima, Yoshito (2016): On the Sources of the Feldstein-Horioka Puzzle across Time and Frequencies.

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There are several candidate explanations for the Feldstein--Horioka puzzle. This paper provides a quantitative assessment of the relative role of the existing explanations for saving--investment comovement performing time-frequency domain analysis for nine countries from 1885 to 2010. The main findings are summarized as follows. First, in large economies, such as the US and Italy, to a greater extent high correlations between saving and investment are observed than in middle-sized and small countries. Second, we obtain two groups of countries in terms of time-changing patterns of correlations: U-shaped and decreasing patterns of capital mobility. Third, fiscal balance seems to be most related to positive saving-investment correlations in many countries. Fourth, a global common factor also plays an important role in explaining the Feldstein-Horioka puzzle.

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