The Feldstein-Horioka puzzle and the global recession period: Evidence from South Africa using asymmetric cointegration analysis

Phiri, Andrew (2017): The Feldstein-Horioka puzzle and the global recession period: Evidence from South Africa using asymmetric cointegration analysis.

Abstract

In this study we examine the effects of the 2007-2008 global financial crisis on the Feldstein-Horioka coefficient for South Africa using momentum threshold cointegration and error correction techniques applied to quarterly national savings-investment time series collected between 2000:Q1 and 2017:Q1. Our empirical strategy consists of segregating the data into three samples; one corresponding to the full sample (1960:Q1 – 2016:Q4), another corresponding to the pre-crisis period (1960:Q1-2008:Q3) and the last corresponding to the post-crisis period (2008:Q4-2016:Q4). Our empirical results validate asymmetric cointegration effects for both the full and the pre-crisis periods while only accepting a linear cointegration relation for the post-crisis period. The saving-retention coefficient estimates produced are 0.59 (significant), 0.64 (significant), and 0.22 (insignificant) for the full, pre-crisis and post-crisis periods, respectively. These results imply that international capital mobility has increased in the post-crisis period and this may be primarily due to the effects of a redirection of private capital flows by investors to safe haven assets. Therefore policy plans of further relaxing of capital controls is inadvisable considering that capital is already highly mobile.

• Item Type: MPRA Paper
• Language: English
• Keywords: Investment; Savings; Feldstein-Horioka puzzle; Threshold cointegration; Threshold error correction model; Sub-Saharan Africa; South Africa
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Abbott A. and de Vita G. (2003), “Another piece in the Feldstein-Horioka puzzle”, Scottish Journal of Political Economy, 50(1), 69-89.

Adams S., Sakyi D., Evans E. and Opoku O. (2016), “Capital inflows and domestic investment in Sub-Saharan Africa”, Foreign Trade Review, 51(4), 328-343.

Adedeji O. and Thornton J. (2006), “Saving, investment and capital mobility in African countries”, Journal of African Economies, 16(3), 393-405

Adedeji O. and Thornton J. (2008), “International capital mobility: Evidence from panel cointegration tests”, Economic Letters, 16(3), 393-405

Afzal M. (1995), “Saving and investment in developing countries: Granger causality test”, Philippine Review of Economics, 44(2), 99-110.

Aka B. (2007), “The saving-investment relationships: A Markov-Switching causality analysis of Cote d’Ivoire and Ghana”, Applied Econometrics and International Development, 7(2), 157-162.

Amirkhalkhali S. and Dar A. (2007), “Trade openness and the saving-investment correlations”, Economic Modelling, 24, 120-127.

Argimon I. and Roldan J. (1994), “Saving, investment and international capital mobility in EC countries”, European Economic Review, 38, 59-67.

Armstrong H., Balasubramanyam V. and Salisu M. (1996), “Domestic savings, intra-national and intra-European Union capital flows, 1091-1991”, European Economic Review, 40, 1229-1235.

Bangake C. and Eggoh J. (2011), “The Feldstein-Horioka puzzle in African countries: A panel cointegration analysis”, Economic Modelling, 28(3), 939-947.

Barros C. and Gil-Alana L. (2015), “Investment and saving in Angola and the Feldstein-Horioka puzzle”, Applied Economics, 47(44), 4793-4800.

Bautista C. and Maveyraud-Tricoire S. (2007), “Saving-investment relationship, financial crisis and structural changes in East Asian countries”, Economie Internationale, 111, 81-99.

Behera S. (2015), “Saving-investment dynamics and capital mobility in the BRICS, 1970-2013”, Applied Econometrics and International Development, 15(1), 5-22.

Bonga-Bonga L. and Guma N. (2017), “The relationship between savings and economic growth at the disaggregated level”, Economia Internazionale, 70(1), 1-24.

Brahmasrene T. and Jiranyakul K. (2009), “Capital mobility in Asia: Evidence from bounds testing of cointegration between savings and investment”, Journal of the Asia Pacific Economy, 14(3), 262-269.

But B. and Moley B. (2016), “The Feldstein-Horioka puzzle and capital mobility: The role of the recent financial crisis”, Economic Systems, 41(1), 139-150.

Cadoret I. (2001), “The saving investment elation: A panel data approach”, Applied Economic Letters, 8(8), 517-520.

Caporale G., Panopoulou E. and Pittis N. (2005), “The Feldstein-Horioka puzzle revisited: A Monte Carlo study”, Journal of International Money and Finance, 24, 1143-1149.

Caner M. and Hansen B. (2001), “Threshold autoregression with a unit root”, Econometrica, 69(6), 1555-1596.

Chakrabarti A. (2006), “The saving-investment relationship re-visited: New evidence from multivariate heterogeneous panel cointegration analyses”, Journal of Comparative Economics, 34, 402-419.

Chan K. (1993), “Consistency and limiting distribution of the least squares estimator of a threshold autoregressive model”, Annals of Statistics, 21, 520-531.

Chan K., Dang Q., Lai J. and Yan I. (2011), “Regional capital mobility in China: 1978-2006”, Journal of International Money and Finance, 30(7), 1506-1515.

Chang Y. and Smith T. (2014), “Feldstein-Horioka puzzles”, European Economic Review, 72, 98-112.

Chen S. and Shen C. (2015) “Revisiting the Feldstein-Horioka puzzle with regime switching: New evidence from European countries”, Economic Modelling, 49, 260-269.

Chu K. (2012), “The Feldstein-Horioka puzzle and spurious ratio correlation”, Journal of International Money and Finance, 31(2), 292-309.

Coakley J. and Kulasi F. (1997), “Cointegration of long span saving and investment”, Economic Letters, 54(1), 1-6.

Coakley J., Fuertes A. and Spagnolo F. (2005), “IS the Feldstein-Horioka puzzle history?”, The Manchester School, 72(5), 569-590.

Coiteux M. and Olivier S. (2000), “The saving retention coefficient in the long-run and in the short run: Evidence from panel data”, Journal of International Money and Finance, 19(4), 535-548.

Cooray A. and Sinha D. (2007), “The Feldstein-Horioka model revisited for African economies”, Applied Economics, 39(12), 1501-1510.

Corbin A. (2001), “Country-specific effect in the Feldstein-Horioka paradox: A panel data analysis”, Economic Letters, 72(3), 297-302.

Corbin A. (2004), “Capital mobility and adjustment of the current account imbalances: A bounds testing approach to cointegration in 12 countries (1880-2001)”, Economic Letters, 9(3), 257-276.

Cyrille S. (2010), “Saving-investment correlation and capital mobility in Sub-Saharan African countries: A reappraisal through inward and outward capital flows’ correlation”, International Journal of Economics and Finance, 2(2), 97-106.

Darkos A., Kouretas G., Stavroyiannis S. and Zarangas L. (2016), “Is the Feldstein-Horioka puzzle still with us? National saving-investment dynamics and international capital mobility: A panel data analysis across EU member countries”, Journal of International Finance Markets, Institutions and Money, 47, 76-88.

Dekle R. (1996), “Saving-investment associations and capital mobility: On evidence from Japanese regional data”, Journal of International Economics, 41(1-2), 53-72.

De Vita G. and Abbott A. (2002), “Are saving and investment cointegrated? An ARDL bounds testing approach”, Economic Letters, 77(2), 293-299.

De Wet A. and Van Eyden R. (2005), “Capital mobility in Sub-Saharan Africa: A panel data approach”, South African Journal of Economies, 73(1), 22-35.

Di Iorio F. and Fachin S. (2014), “Savings and investment in the OECD 1970-2007: A test of panel cointegration with regime changes”, North American Journal of Economics and Finance, 28, 59-76.

Dooley M., Frankel J. and Mathieson D. (1987), “International capital mobility: What do savings-investment correlations tell us?”, IMF Staff Papers, 34(3), 503-530.

Dursun G. and Abasiz T. (2014),”Feldstein-Horioka puzzle in Turkey”, Dogus Universitesi Dergisi, 15(1), 45-63.

Dzhumashev R. and Cooray A. (2016), “The Feldstein-Horioka hypothesis revisited”, B.E. Journal of Macroeconomics, 77(1), 1-30.

Eslamloueyan K. and Jafari M. (2010), “Capital mobility, openness, and saving-investment relationship in Asia”, Economic Modelling, 27(5), 1246-1252.

Enders and Granger (1998), “Unit root tests and asymmetric adjustment with an example using the term structure of interest rates”, Journal of Business and Economic Statistics, 16(3), 304-311.

Enders W. and Silkos P. (2001), “Cointegration and threshold adjustment”, Journal of Business and Economic Statistics, 19(2), 166-176.

Engle, R. and Granger, C. (1987) “Co-integration and error correction: Representation, estimation, and testing” Econometrica, 55, 369-384.

Feldstein M. and Horioka C. (1983), “Domestic saving and international capital flows”, The Economic Journal, 90(358), 314-329.

Feldstein M. (1983), “Domestic saving and international capital movements in the long run and the short run”, European Economic Review, 21(1-2), 129-151.

Fouquau J., Hurlin C. and Rabaud I. (2008), “The Feldstein-Horioka puzzle: A panel smooth transition regression approach”, Economic Modelling, 25(2), 284-299.

Georgopoulos G. and Hejazi W. (2005), “Feldstein-Horioka meets time trend”, Economic Letters, 86(3), 353-357.

Georgopoulos G. and Hejazi W. (2009), “The Feldstein-Horioka puzzle revisited: Is home bias much less?”, Economic Letters, 18(2), 341-350.

Gil-Alana L., Andre C., Gupta R., Chang T. and Ranjbar O. (2016), “The Fieldstein-Horioka puzzle in South Africa”, The International Journal of Trade and Economic Development, 25(7), 978-991.

Golub S. (1990), “International capital mobility: Net versus gross stocks and flows”, Journal of International Money and Finance, 9(4), 424-39.

Gonzalez A., Terasvirta T and van Dijk D. (2005), “Panel smooth transition regression model”, Quantitative Finance Research Centre, Research Paper 165, August.

Gregory A. and Hansen B. (1996), “Residual-based tests for cointegration in models with regime shifts”, Journal of Econometrics, 70, 99-126.

Grullon S. (2016), “The Feldstein-Horioka hypothesis: Co-integration and causality results for selected countries”, Quarterly Journal of Business Studies, 2(3), 134-142.

Guillaumin C. (2009), “Financial integration in East Asia: Evidence from panel unit root and panel cointegration tests”, Journal of Asian Economies, 20(3), 314-326.

Gulley D. (1992), “Are saving and investment cointegrated? Another look at the data”, Economic Letters, 39(1), 55-58.

Guzel A. and Ozdemir Z. (2011), “The Feldstein-Horioka puzzle in the presence of structural shifts: The case of Japan versus the USA”, Research in International Business and Finance, 25(2), 195-202.

Hamilton J. (1989), “A new approach to the economic analysis of nonstationary time series and the business cycle”, Econometrica, 58, 357-384.

Hansen B. (1999), “Threshold effects in non-dynamic panels: Estimation testing and inference”, Journal of Econometrics, 93(2), 345-368.

Hansen B. and Seo B. (2002), “Testing for two-regime threshold cointegration in vector error-correction models”, Journal of Econometrics, 110(2), 293-318.

Hatemi-J A. (2008), “Tests for cointegration with two unknown regime shifts with an application to financial market integration”, Empirical Economics, 135(3), 497-505.

Herwartz H. and Xu F. (2010), “A functional coefficient model view of the Feldstein-Horioka puzzle”, Journal of International Money and Finance, 29(1), 37-54.

Ho T. (2002), “The Feldstein-Horioka puzzle revisited”, Journal of International Money and Finance, 21(4), 555-564.

Ho T. (2003) “The saving-retention coefficient and country-size: The Feldstein-Horioka puzzle reconsidered”, Journal of Macroeconomics, 25(3), 387-396.

Hoffman M. (2004), “International capital mobility in the long-run and the short run: Can we still learn from saving-investment data?”, Journal of International Money and Finance, 23(1), 113-131.

Holmes M. and Otero J. (2014), “Re-examining the Feldstein-Horioka and Sach’s views of capital mobility: A heterogeneous panel set-up”, International Review of Economics and Finance, 33, 1-11.

Hussein K. (1998), “International capital mobility in OECD countries: The Feldstein-Horioka ‘puzzle’ revisited”, Economic Letters, 59(2), 237-242.

Jansen W. (1996), “Estimating saving-investment correlations: Evidence for OECD countries based on an error correction model”, Journal of International Money and Finance, 15(5), 749-781.

Jansen W. (2000), “International capital mobility: Evidence from panel data”, Journal of International Money and Finance, 19(4), 507-511.

Jiang M. (2014), “Saving-investment association and regional capital mobility in China: A nonparametric panel approach”, Pacific Economic Review, 19(2), 184-200.

Johnson M. and Lamdin D. (2014), “Investment and savings and the Euro crisis: A new look at Feldstein-Horioka”, Journal of Economics and Business, 76, 101-114.

Josic H. and Josic M. (2012), “Testing the validity of the Feldstein-Horioka puzzle for Croatia” Economic Research, 25(3), 580-599.

Katsimi M. and Zoega G. (2016), “European integration and the Feldstein-Horioka puzzle”, Oxford Bulletin of Economics and Statistics, 78(6), 834-852.

Ketenci N. (2013), “The Feldstein-Horioka puzzle in groupings of OECD members: A panel approach”, Research in Economics, 67(1), 76-87.

Khundrakpam J. and Ranjan R. (2010), “Saving-investment nexus and international capital mobility in India: Revisiting Feldstein-Horioka hypothesis”, Indian Economic Review, 45(1), 49-66.

Kim H., Oh K. and Jeong C. (2005), “Panel cointegration results on international capital mobility in Asian economies”, Journal of International Money and Finance, 24(1), 71-82.

Kim S. (2001), “The saving-investment correlation puzzle is still a puzzle”, Journal of International Money and Finance, 20(7), 1017-1034.

Kim S., Kim S. and Wang Y. (2007), “Saving, investment and international capital mobility in East Asia”, Japan and the World Economy, 19(2), 279-291.

Kim W. and Jeon B. (2011), “Has international capital mobility increased in Asia? Evidence from the post-1997 financial crisis”, Contemporary Economic Policy, 31(2), 345-365.

Kollias C., Mylonidis N. and Paleologou S. (2008), “The Feldstein-Horioka puzzle across EU members: Evidence from the ARDL bounds approach and panel data”, International Review of Economics and Finance, 17(3), 380-387.

Konya L. (2015), “Saving and Investment rates in BRICS countries”, The Journal of International Trade and Economic Development, 24(3), 429-449.

Krol R. (1996), “International capital mobility: Evidence from panel data”, Journal of International Money and Finance, 15(3), 467-474.

Kumar S. and Rao B. (2011), “A time-series approach to the Feldstein-Horioka puzzle with panel data from OECD countries”, The World Economy, 34(3), 473-485.

Le Roux P. and Moyo C., “Financial liberalization and economic growth in SADC” ERSA Working Paper. 516, May.

Levy D. (2000), “Investment-saving comovement and capital mobility: Evidence from century long U.S. time series”, Review of Economic Dynamics, 3(1), 100-136.

Li C. (2010), “Savings, investment, and capital mobility within China”, China Economic Review, 21(1) 14-23.

Miller S. (1988), “Are saving and investment cointegrated?”, Economic Letters, 27(1), 31-34.

Moreno R. (1997), “Saving-investment dynamics and capital mobility in the US and Japan”, Journal of International Money and Finance, 16(6), 837-863.

Murphy R. (1984), “Capital mobility and the relationship between saving and investment rates”, Journal of International Money and Finance, 3(3), 327-342.

Narayan P. (2005), “The relationship between saving and investment for Japan”, Japan and the World Economy, 17(3), 293-309.

Narayan P. (2005), “The saving and investment nexus for China: Evidence from cointegration tests”, Applied Economics, 37(17), 1979-1990.

Narayan P. and Narayan S. (2010), “Testing for capital mobility: New evidence from a panel of G7 countries”, Research in International Business and Finance, 24(1), 15-23.

Nindi A. and Odhiambo N. (2014), “Savings and investment in Malawi: A causality test”, Investment Management and Financial Innovations, 11(4), 77-84.

Obstfeld M. (1986), “Capital mobility in the world economy: Theory and measurement”, Carnegie-Rochester Conference Series on Public Policy, 24, 55-104.

Obstfeld M. and Rogoff K. (2000), “The six major puzzles in international macroeconomics: Is there a common cause?”, NBER Macroeconomics Annual, 15, 339-390.

Odhiambo N. (2009), “Savings and economic growth in South Africa: A multivariate causality test”, Journal of Policy Modeling, 31, 708-718.

Ostry J., Ghosh A., Habermeier K., Chamon M., Qureshi M. and Reinhart D. (2010), “CApoital inflows: The role of controls”, IMF Staff Position Note 10/04, February.

Ozmen E. and Parmaksiz K. (2003), “Policy regime change and the Feldstein-Horioka puzzle: The UK evidence”, Journal o Policy Modeling, 25(2), 137-149.

Payne J. and Kumazawa R. (2005) “Capital mobility, foreign aid, and openness: Further panel evidence from Sub-Saharan Africa”, Journal of Economic and Finance, 29(1), 122-126.

Pelagidis T. and Mastroyiannis T. (2003), “The saving-investment correlation for Greece, 1960-1997: implications for capital mobility”, Journal of Policy Modeling, 25, 609-616.

Pelgrin F. and Schich S. (2008), “International capital mobility: What do national saving-investment dynamics tell us?”, Journal of International Money and Finance, 27(3), 331-344.

Penati A. and Dooley M. (1984), “Current account imbalances and capital formation in industrial countries, 1949-81”, IMF Staff Papers, 31(1), 1-24.

Phiri A. (2015), “Tourism and economic growth in South Africa: Evidence from linear and nonlinear cointegration frameworks”, Managing Global Transitions, 14(2), 45-67.

Phiri A. (2016), “Inflation persistence and monetary policy in South Africa: Is the 3% to 6% inflation target too persistent”, International Journal of Sustainable Economy, 8(2), 111-124.

Raheem I. (2017), “More finance or better finance in Feldstein-Horioka puzzle: Evidence from SSA countries”, Global Business Review, 18(1), 1-12.

Rao B., Tamazian A. and Kumar S. (2010), “Systems GMM estimates of the Feldstein-Horioka puzzle for OECD countries and tests for structural breaks”, Economic Modeling, 27(5), 1269-1273.

Sarno L. and Taylor M. (1998), “Exchange controls, international capital flows and saving-investment correlations in the U.K.: An empirical investigation”, Review of World Economics, 134(1), 69-98.

Shibata A. and Shintani M. (1998), “Capital mobility in the world economy: An alternative test”, Journal of International Money and Finance, 17(5), 741-756.

Singh T. (2008), “Testing the saving-investment correlations in India: An evidence from single-equation and system equations”, Economic Modelling, 25(5), 1064-1079.

Sinha D. (2002), “Saving-investment relationships for Japan and other Asian countries”, Japan and the World Economy, 14, 1-23.

Sinha T. and Sinha D. (2004), “The mother of puzzles would not go away”, Economic Letters, 82(2), 259-267.

Sinn S. (1992), “Saving-investment correlations and capital mobility: On evidence from annual data”, Economic Journal, 102(414), 1162-1170.

Telatar E., Telatar F. and Bolatoglu N. (2007), “A regime switching approach to the Feldstein-Horioka puzzle: Evidence from some European countries”, Journal of Policy Modeling, 29(3), 523-533.

Tesar L. (1991), “Savings, investment and international capital flows”, Journal of International Economics, 31(1-2), 55-78.

Wang M. (2013), “An investigation of the Feldstein-Horioka puzzle for the Association of Southeast Asian Nations economies”, The Australian Economic Review”, 46(4), 424-443.

Yamori N. (1995), “The relationship between domestic savings and investment: The Feldstein-Horioka test using Japanese regional data”, Economic Letters, 48(3-4), 361-366.