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    Current account solvency and the Feldstein-Horioka puzzle

    Coakley, J. and Kulasi, F. and Smith, Ron P. (1996) Current account solvency and the Feldstein-Horioka puzzle. The Economic Journal 106 (436), pp. 620-627. ISSN 0013-0133.

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    In this paper we suggest an alternative explanation of the high cross-section association between shares of saving and investment in GDP which Feldstein and Horioka (1980) interpret as evidence of low capital mobility. In OECD countries, saving and investment shares appear to be I(I). We show that a solvency constraint implies that the current balance is stationary and thus that saving and investment cointegrate with a unit coefficient irrespective of the degree of capital mobility. It is this long-run relation that the FH cross-section regression captures. Econometric results for 23 OECD countries over the 1960-92 period are consistent with this explanation.


    Item Type: Article
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Sarah Hall
    Date Deposited: 31 Aug 2020 18:38
    Last Modified: 01 Dec 2021 16:25


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