The Feldstein –Horioka Puzzle and structural breaks: evidence from EU members.

The purpose of this paper is to investigate the level of capital mobility in European Union members using the Feldstein-Horioka puzzle proposed by Feldstein and Horioka (1980) in order to investigate relations between saving and investment flows. In this paper, data for 27 European countries were used over the period of 1995-2009 on the quarterly basis. Data were extracted from the official statistical site of the European Union, Eurostat. Firstly, unit root tests were applied to the series in order to estimate the stationarity of the model variables. Two different tests were used, which are the Ng and Perron (2001) unit root test procedure and approach proposed by Zivot and Andrews (1992) for unit root test allowing for a structural shift. Then the Bai and Perron (1998) structural break test was applied to determine the presence of structural breaks in series. In most countries except Belgium and Finland UDmax and WD max tests rejected the hypothesis of no breaks. Moreover, structural break locations for every series were selected by sequentially procedure, BIC and LWZ. Finally, the cointegration relationships between investment and saving flows of European Union members were tested. Three different cointegration techniques were applied to the data. Firstly, the Johansen (1988) cointegration approach was used for the case of no cointegration shifts, then the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift. Finally, again the Johansen’ cointegration approach was used; however, this time with the inclusion of dummy variables related to earlier selected structural break locations. The empirical results provided stronger evidence of cointegration between investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks was ignored. In most cases of estimations saving-investment correlation has a tendency to increase with regime changes. However, the estimated saving retention coefficient in the presence of structural breaks using the Bai and Perron (1998) approach appeared relatively low in many cases, illustrating by this the openness of estimated countries. In general, world and European countries with time have a tendency to a higher level of their capital market openness. According to Feldstein and Horioka (1980), a higher saving-investment correlation is related to lower capital mobility. Therefore, the contradicting results between saving retention coefficient estimates and cointegration tests illustrate that cointegration indicates a rather current account solvency condition than capital mobility. Estimations of a saving retention coefficient in the presence of structural changes do not support the existence of the Feldstein-Horioka Puzzle in the considered EU countries.Feldstein-Horioka puzzle, saving-investment association, capital mobility, cointegration, structural breaks, EU.

The Feldstein Horioka Puzzle by groups of OECD members: the panel approach.

This paper investigates investment savings relationships in 26 OECD countries and how these relationships change when countries in the considered panel vary. Therefore panel estimations using annual data for the period 1970-2008 are made for different groups of developed countries, such as the OECD, EU15, NAFTA and G7. Additionally, this paper examines changes in investment saving relationships in groups of developed countries taking into account the presence of structural shifts in countries where they exist. Recent panel techniques are employed in this study to examine investment savings relationships and to estimate saving retention coefficients. The empirical findings reveal that the Feldstein-Horioka puzzle exists only in the panel of G7 countries where the saving-retention coefficient is estimated at the level 0.754 and 0.864 for the full sample of G7 countries and for stable countries, respectively. The estimated saving-retention coefficient for the G7 group of unstable appear at the 0.482 level, indicating a higher level of capital mobility in unstable countries compared to stable ones. This conclusion is supported by estimations for OECD and EU15 countries.Feldstein-Horioka puzzle, capital mobility, structural breaks, panel estimations, OECD.

Determinants of current account in the EU: the relation between internal and external balances in the new members

This paper considers the major determinants of the current account in the new members of the EU. It examines the long-run and short-run impact of real exchange rate, investment, private and public savings on current account. The bounds testing autoregressive distributed lag (ARDL) approach to cointegration is used and the results indicate that twin deficit exists; in another words, government budget deficit shocks have led to deficit in current accounts in Czech Republic, Latvia, Lithuania, Slovenia and Slovakia for the considered period. At the same time, empirical evidence was found that private savings, investment and real exchange rate are key variables as well, causing changes in the current account in the long-run as well as in the short-run. Finally, stability tests were applied to the model indicating no evidence of any structural instability in the model of these countries.Twin deficit, current account balance, budget deficit, EU.

Current account and relative prices: cointegration in the presence of structural breaks in emerging economies

The aim of this study is to examine the long-run relationship between the current account and relative prices such as terms of trade and real exchange rate for the emerging economies. These variables have been exposed to large fluctuations for more than the last two decades nearly in all emerging economies. Therefore, structural breaks have to be taken into account in estimations. Therefore, the recent panel cointegration method developed by Westerlund (2006) was applied to the current account model allowing for structural breaks. The estimations of unit root tests proposed by Levin et al. (2002), Im et al. (2003) and by Hadri (2000) provided the evidence of the unit root existence in our series. The Hansen’s (1992) stability test illustrated the instability exist in series except for the cases of India and Turkey. The Westerlund (2006) cointegration test estimations detected multiple structural shifts in every panel case; however, the hypothesis of cointegration in the panel could not be accepted by the Lagrange Multiplier statistics.Current account; Terms of trade; Panel cointegration; Structural breaks

Impact of the Global Financial Crisis on the Level of Capital Mobility in EU Members

This study investigates the level of capital mobility in European Union members and the impact of the global financial crisis on the capital mobility indicators. The capital mobility is examined by testing the Feldstein-Horioka puzzle. This study estimates quarterly data for 27 European countries for the period of 1995-2013 and employs the standard and dynamic generalized method of moments (GMM) estimation techniques. The results of the standard GMM estimations did not provide the evidence to support the Feldstein-Horioka puzzle, where the saving retention coefficient demonstrates the high capital mobility in European Union countries. However the results of the dynamic GMM estimations indicates that inclusion of historical values of investment and savings in the regression decreases the level of capital mobility in European countries. The consideration of the global financial crisis in the model revealed insignificant changes in capital mobility indicators, which means that the inclusion of the global financial crisis does not have an impact on the capital mobility analysis in European countries

Nuclear Energy of Turkey in the context of the Russian experience.

Nuclear energy has become one of the widely discussed topics in Turkey due to the controversial points of view. Turkey is new to nuclear power; the construction of the first nuclear reactor started in April of 2018. Production of electricity in Turkey is highly dependent on imported energy sources. Continuously increasing energy prices and foreign energy supply reduce national energy security and undermine the sustainable economic growth of the country, whose exports heavily depend on foreign energy sources. Therefore; one of the solutions to decrease dependence on foreign energy sources for such an industrial country, as Turkey, is to produce nuclear energy. Opinions of specialists and the population are divided in controversial groups, where advantages and disadvantages of nuclear power oppose each other. This chapter analyses the usage of nuclear power in the world and reasons for countries, which have reduced or vice versa increased the implementation of nuclear energy. The Russian company conducts the construction of the first nuclear plant in Turkey, therefore history and experience of Russia in nuclear energy are analysed in this chapter. The discussion on benefits and weaknesses of Russian experiences and how they can be applied to new a Turkish nuclear industry conclude the chapter

The environmental Kuznets curve in the case of Russia

This study explores the relationships between carbon emissions and their main determinants such as energy consumption, real income, international trade, level of education and level of urbanization in the Russian Federation, employing data for the period 1991-2016. Support for the environmental Kuznets curve hypothesis is found in this study, stating that environment pollution decreases in Russia after income achieves a certain threshold. The ARDL bounds test is employed in order to estimate short-run and long-run relation-ships in the estimated model. Energy consumption, real income, education and urbanization levels are found to be significant determinants of carbon emissions, while trade open-ness does not have an impact. The Granger causality test indicates two-way relationships between carbon emissions and energy use, real income and education. Only a single one-way causality runs from carbon emission to trade and no causality was found between carbon emissions and level of urbanization

Impact of the Global Financial Crisis on the Level of Capital Mobility in EU Members

This study investigates the level of capital mobility in European Union members and the impact of the global financial crisis on the capital mobility indicators. The capital mobility is examined by testing the Feldstein-Horioka puzzle. This study estimates quarterly data for 27 European countries for the period of 1995-2013 and employs the standard and dynamic generalized method of moments (GMM) estimation techniques. The results of the standard GMM estimations did not provide the evidence to support the Feldstein-Horioka puzzle, where the saving retention coefficient demonstrates the high capital mobility in European Union countries. However the results of the dynamic GMM estimations indicates that inclusion of historical values of investment and savings in the regression decreases the level of capital mobility in European countries. The consideration of the global financial crisis in the model revealed insignificant changes in capital mobility indicators, which means that the inclusion of the global financial crisis does not have an impact on the capital mobility analysis in European countries

The bilateral trade balance of the EU in the presence of structural breaks

This paper examines the bilateral trade dynamics of the EU with its major trade partners. Previous studies on the bilateral trade dynamics of the EU have been based on estimations without the consideration of the presence of structural breaks. This paper examines the impacts of the real exchange rate and real income on the trade balance of the EU with its major trade partners in the presence of structural breaks. The empirical analysis includes ten major trade partners of the EU for 1980-2012, on a quarterly basis. The paper applies the Bai and Perron (1998) structural break test to determine the presence of structural breaks in series. In order to test the cointegration relationships of series, three different cointegration techniques were applied to the data. First, the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift; then, for cases where two breaks were detected, the Hatemi-J (2008) cointegration test was employed. Finally, for countries where more than two breaks are detected, the Maki (2012) cointegration test was applied, which allows for an unknown number of breaks. The parameters of the model were estimated using the Bai and Perron (1998) procedure, which allows for structural breaks, and the OLS procedure without consideration of structural breaks. The paper investigates how the different dynamics of the bilateral trade balance of the EU appear after possible structural breaks consideration

The Effect of the European Union Customs Union on the Balance of Trade in Turkey

This paper investigates the effect of the customs union between Turkey and the European Union on the balance of trade in Turkey. The framework for analysis is an extended trade gravity model onto which the impact of the customs union is applied. The gravity model of trade is estimated using dynamic panel data which applies the Generalized Method of Moments to a sample of OECD countries. Separate estimates were made for the periods before and after the process of trade liberalization in Turkey – 1980-1995 and 1996-2012, respectively – as well as for the full period – 1980-2012. The main conclusion is that when the European Union is accounted for as an econometric variable, the empirical results are striking: Turkey’s gains resulting from taking part in the customs union are noteworthy, with significant improvement in the trade balance with European Union countries. However, the trade flows, and specifically imports, have been mainly with OECD countries that are themselves not members of the EU. The model indicates that external common tariffs are responsible for Turkey’s trade growth rather than tariffs abolished in the internal market of the customs union