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A Time Series Approach to the Feldstein-Horioka Puzzle with Panel Data from the OECD Countries

By Saten Kumar and B. Bhaskara Rao

Abstract

The Pedroni method is used to estimate the Feldstein-Horioka equation from 1960-2007 with a panel of 13 OECD countries. It is found that the Feldstein-Horioka puzzle exists in a weaker form with a much reduced saving retention coefficient. The Bretton Woods agreement in particular has weakened the Feldstein-Horioka puzzle by significantly improving the international capital mobility. In comparison the Maastricht agreement seems to have improved capital mobility only by a small magnitude. The structural break tests of Westerlund are used in this paper.Feldstein-Horioka puzzle; Structural breaks; Bretton Woods and Maastricht agreements; International capital mobility

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