International Capital Mobility and its Policy Implications for Asia-Pacific Economies

International Capital Mobility and its Policy Implications for Asia-Pacific Economies

This paper investigates the savings-investment relationship, also known as the Feldstein-Horioka puzzle, for 28 Asia-Pacific countries from 1960 to 2006. It utilizes recently developed panel cointegration techniques to test and estimate the long-run equilibrium relationship between savings and investment. Investment and savings rates are found to have unit roots and to be cointegrated, based on five different panel unit root tests and three types of panel cointegration tests. The estimated coefficients on the savings rate, employing CCR, DOLS, and FMOLS techniques, exhibit a declining trend over subsample periods including the structural break for the Asian financial crisis in 1997-98. This suggests that international capital mobility in the Asia-Pacific economies increased substantially in the 1990s and 2000s. Moreover, the magnitude of the estimated savings-retention coefficients is much smaller than that reported by Feldstein and Horioka.

This paper investigates the savings-investment relationship, also known as the Feldstein-Horioka puzzle, for 28 Asia-Pacific countries from 1960 to 2006. It utilizes recently developed panel cointegration techniques to test and estimate the long-run equilibrium relationship between savings and investment. Investment and savings rates are found to have unit roots and to be cointegrated, based on five different panel unit root tests and three types of panel cointegration tests. The estimated coefficients on the savings rate, employing CCR, DOLS, and FMOLS techniques, exhibit a declining trend over subsample periods including the structural break for the Asian financial crisis in 1997-98. This suggests that international capital mobility in the Asia-Pacific economies increased substantially in the 1990s and 2000s. Moreover, the magnitude of the estimated savings-retention coefficients is much smaller than that reported by Feldstein and Horioka.