NATIONAL SAVING-INVESTMENT RELATIONSHIP AND … · HORIOKA PUZZLE REVISITED Aantal woorden / Word count: 16.176 ... there is little evidence in favour of higher capital mobility and

NATIONAL SAVING-INVESTMENTRELATIONSHIP AND INTERNATIONALCAPITAL MOBILITY: THE FELDSTEIN-HORIOKAPUZZLEREVISITEDAantalwoorden/Wordcount:16.176

ValeryiaYershStamnummer/studentnumber:000180090503Promotor/supervisor:Prof.Dr.GerdieEveraertMasterproefvoorgedragentothetbekomenvandegraadvan:Master’sDissertationsubmittedtoobtainthedegreeof:MasterinEconomicsAcademiejaar/Academicyear:2018-2019

Vertrouwelijkheidsclausule/CONFIDENTIALITYAGREEMENTEenA-4metéénvanvolgendeclausulesdientopgenomentewordenindemasterproef.Addoneofthefollowingclausesinthemaster’sdissertation.PERMISSIONOndergetekendeverklaartdatdeinhoudvandezemasterproefmaggeraadpleegden/ofgereproduceerdworden,mitsbronvermelding.IdeclarethatthecontentofthisMaster’sDissertationmaybeconsultedand/orreproduced,providedthatthesourceisreferenced.Naamstudent/namestudent:………………………………………………………………………………………………Handtekening/signatureNOPERMISSIONOndergetekendeverklaartdatdeinhoudvandezemasterproefnietmaggeraadpleegden/ofgereproduceerdworden.IdeclarethatthecontentofthisMaster’sDissertationmaynotbeconsultedand/orreproduced.Naamstudent/namestudent:………………………………………………………………………………………………..Handtekening/signature

I

Abstract

Inthisresearchwork,therelevanceoftheFeldstein-Horiokapuzzleischeckedandthedegreeof

capitalmobilityismeasuredfortheworldpanelof116countries,agroupofeconomicregions,free

tradeareas,customsunions,pre-andpost-Maastrichtperiods,pre-andpost-2008crisisperiods.

Theresearchbeginswithanextensivesummaryofempiricalworkandresearchwhichfocusonthe

solutionsandexplanationsfortheFeldstein-Horiokapuzzle.Thepaperutilizesfirst-andsecond-

genearionunitrootteststocheckthesavingsandinvestmentseriesfornon-stationarity.Thenit

proceedstoPedronicointegrationtesttocheckwhethertheseriesformalong-termcointegrating

relationship.Afterthat,themodelisestimatedusingtwoapproaches.Thefirstconventional

approachemploysapanelerror-correctionframeworkwhichdistinguishesbetweenshort-runand

long-runsaving-retentioncoefficients,orthefamous‘Feldstein-Horiokacoefficient’.Thesecond

newspecificationofthemodelcomprisesfixingofthelong-runcoefficientatthevalueofonein

ordertoabidetheintertemporalbudgetconstraint,whichhasamorep�lausibleandrealistic

interpretation.Additionally,thepapermakesanattempttocheckwhetherthesavings-retention

coefficientsforthepanelof116countriesarerobusttotheinclusionofthefollowingvariables:

populationgrowthandsizeofthecountry.Finally,therobustnessoftheresultsisalsocheckedin

theupgradedmodelwiththevariable,representingthepoolofinternationalsavings.Bothmodels

havebeenestimatedusingtheCommonCorrelatedEffectsMeanGroup(CCEMG)estimator.

Theresultsfromthefirstapproachindicatethatthereisarelativelyhighdegreeofcapitalmobility

intheshortrunwhereasthelong-runcapitalmobilityisrelativelymedium.However,theresults

fromthesecondapproach,whichisthemainfocusofthisresearch,indicatethatthelong-run

capitalmobilityisrelativelyhighinalltheanalysedsampleswiththeexceptionofthepre-

Maastrichtperiod,post-2008crisisperiod,andthreefreetradeareas:ASEAN,LAFTA,andthe

AndeanCommunity.Asfortheshort-termcoefficients,theestimatesindicatethatallthe

subsamplesobserverelativelyhighcapitalmobilityintheshortrunwiththeexceptionofthepre-

MaastrichtperiodandG7.

Theresultsfromthesecondapproachhavealsobeenfoundtoberobusttotheinclusionofthe

followingvariables:populationgrowth,sizeofthecountry,andglobalsavings.Therefore,itcanbe

concludedthatnoneofthevariablescanexplainthelackofperfectcapitalmobilityworldwide.

II

Tableofcontents

Abstract..........................................................................................................................................................................I

Listoftables..............................................................................................................................................................III

Introduction................................................................................................................................................................1

1. Literaturereview..........................................................................................................................................1

2. Methodology................................................................................................................................................11

3. Data..................................................................................................................................................................20

4. Results............................................................................................................................................................21

Summaryandconclusions.................................................................................................................................44

References................................................................................................................................................................46

III

Listoftables

TABLE1.THELISTOFTHEANALYSEDSUBSAMPLES,NUMBEROFCOUNTRIES,ANDTIMEPERIODS...........20 TABLE2.FIRST-GENERATIONPANELUNITROOTTESTS’RESULTSINLEVELS.........................................................23 TABLE3.FIRST-GENERATIONPANELUNITROOTTESTS’RESULTSINFIRST-DIFFERENCES.............................24TABLE4.CIPSTESTRESULTSFORGROSSSAVINGS..................................................................................................................25TABLE5.CIPSTESTRESULTSFORGROSSINVESTMENT.......................................................................................................26TABLE6.RESULTSOFTHEPEDRONICOINTEGRATIONTESTS...........................................................................................27TABLE7.TESTFORCROSS-DEPENDENCEAMONGCOUNTRIES.........................................................................................28TABLE8.PANELESTIMATIONRESULTSFORTHEWORLDSAMPLE................................................................................29TABLE9.ROBUSTNESSOFTHEESTIMATESTOTHELEVELOFECONOMICDEVELOPMENT...............................30TABLE10.PANELESTIMATIONRESULTSFORDIFFERENTGEOGRAPHICALREGIONS..........................................32TABLE11.PANELESTIMATIONRESULTSFORTHEFREETRADEAREAS......................................................................33TABLE12.PANELESTIMATIONRESULTSFORMERCOSURANDEU.................................................................................34TABLE13.PANELESTIMATIONRESULTSINTHEPRE-ANDPOST-MAASTRICHTPERIODS.................................35TABLE14.PANELESTIMATIONRESULTSINTHEPRE-ANDPOST-2008CRISISPERIODS....................................36TABLE15.PANELCOINTEGRATIONESTIMATION.....................................................................................................................39TABLE16.APPROACHI:ROBUSTNESSTOPOPULATIONGROWTHANDCOUNTRY’SSIZE...................................41TABLE17.APPROACHII:ROBUSTNESSTOPOPULATIONGROWTHANDCOUNTRY’SSIZE..................................42TABLE18.APPROACHI:ROBUSTNESSTOTHEGLOBALSAVINGS....................................................................................43TABLE19.APPROACHII:ROBUSTNESSTOTHEGLOBALSAVINGS...................................................................................43

1

Introduction

Thedegreeofinternationalcapitalmobilityhasbeenoneofthemainsubjectsofconcerntopolicy

makers.Theworldwithperfectcapitalmobilitywouldbecharacterizedbyincreasedfinancial

integration,whichwouldimplyefficientallocationofcapitalworldwide.Inotherwords,thelackof

capitalconstraintswouldletinvestorsobtainmaximumutilityandprofitsjustbymovingtheir

capitalfromadomesticlocationtoaforeignlocationwithhigherreturnsoncapital.Moreover,inan

openeconomywithperfectcapitalmobility,governmentpolicieswouldn’thavesuchadetrimental

effectondomesticinvestmentandoutputgrowthasincaseofanopeneconomywithimperfect

capitalmobilitywheregovernmentscrowdoutprivateinvestmentbypursuingexpansionaryfiscal

policies.Additionally,perfectcapitalmobilityensuresintertemporalsubstitutionand,consequently,

animprovedconsumption-smoothingmechanismofthecurrentaccount(FeldsteinandHorioka,

1980).Estimatingtheextentofcapitalmobility,thus,playsacrucialroleinpolicyimplementation

processes.Suchaprofoundimportanceofcapitalmobilitymeasurementhasresultedintoa

considerablemagnitudeofempiricalinvestigationsintothequestion.Oneofthemostwidely

acceptedmeasurementapproachesisbasedontheseminalworkofFeldsteinandHorioka(1980)

andisnowknownunderthenameof‘theFeldstein-Horiokapuzzle’.Thepuzzlebelongstothegroup

oftheothersixeconomicpuzzlesandisconsideredtobe“themotherofallpuzzles”(Obstfeldand

Rogoff,2000).

TheseminalpaperofFeldsteinandHorioka(1980)exploresthenatureoftherelationshipbetween

savingsandinvestmentinOECDcountrieswhichatthattimewerealreadycharacterizedbyreduced

capitalcontrolsandincreasedfinancialintegration.Theauthorsargueintheirworkthatinacountry

withreducedcapitalconstraints,oneshouldexpectnocorrelationbetweendomesticsavingsand

domesticinvestment.Thereasonisthatsinceinanopeneconomy,onecanfreelyborrowfromthe

internationalpoolofsavings,investorsturntobelessreliantondomesticsavingsasameansto

financingdomesticinvestment.Inordertoseewhethertheongoingfinancialliberalizationatthat

timehadapositiveeffectoncapitalmobilityacrossOECDcountries,FeldsteinandHorioka(1980)

utilizetheaforementionedplausibletheoreticalrelationshipbetweendomesticsavingsand

investmentbyregressingtheratiosofgrossdomesticcapitalformationtoGDPontheratiosofgross

domesticsavingstoGDP.Incaseofhighcapitalmobility,oneshouldexpectazerorelationship

betweensavingsandinvestment;fromtheeconometricperspective,oneshouldexpectasaving-

retentioncoefficientβtobecloseorequaltozero:

2

Contrarytotheirexpectationsofincreasedcapitalmobility,thescholarsobtainasurprisingresultof

atightassociationbetweenthetwoseriesclosetoone.Thus,theauthorsdrawaconclusionthat

thereislittleevidenceinfavourofhighercapitalmobilityandthesuccessoftheongoing

internationalfinancialintegrationstillremainstobeapuzzle.

ThemainfocusofthisresearchworkistochecktherelevanceoftheFeldstein-Horiokapuzzleandto

measurethedegreeofcapitalmobilityfortheworldpanelof116countries,agroupofeconomic

regions,freetradeareas,customsunions,pre-andpost-Maastrichtperiods,pre-andpost-2008crisis

periods,whichwillbedescribedlater.Thisresearchcreatesnoveltyvaluebymakinganumberof

contributionstotheexistingliteratureonthetopic.First,thepapermakesanattempttoanalyseone

ofthelargestpanelsofyearsandcountriessofar.Second,theresearchprovidesthemostextensive

analysisofcapitalmobilityinawidevarietyofsubsampleswhicharederivedfromthemainpanel

basedoncountries’levelsofeconomicdevelopment,extentofeconomicandpoliticalintegration,

geographicallocation,andhistoricalpast.Third,theresearchutilizestwoapproachestoestimatethe

short-runandlong-runrelationshipbetweensavingsandinvestment.Thefirstconventional

approachemploysapanelerror-correctionframeworkwhichdistinguishesbetweenshort-runand

long-runsaving-retentioncoefficients,orthefamous‘Feldstein-Horiokacoefficient’.Themodelhas

thesamespecificationasthemodelsofPelgrinandSchich,2004,BangakeandEggoh,2011,Azaliet

al.,2014,etc.,whointerpretthelong-runcoefficientsinthefollowingway:whenthecoefficientis

significantlydifferentfromone,itisconsideredtobeameasureofcapitalmobilityinthelongrun;

however,whentheestimatedcoefficientsarenotsignificantlydifferentfromone,theauthors

ultimatelyconcludethattheobtainedcoefficientsareratheranindicatorofthebidingsolvency

conditionofthecurrentaccountbutnotanindicatoroflowcapitalmobility.Inthisresearch,sucha

confusinginterpretationofthelong-runsaving-retentioncoefficientisavoided,andthealternative

estimationapproachissuggested.Thenewspecificationofthemodelcomprisesfixingofthelong-

runcoefficientatthevalueofoneinordertoabidetheintertemporalbudgetconstraint,whichhasa

moreplausableandrealisticinterpretation.Additionally,thepapermakesanattempttocheck

whetherthesavings-retentioncoefficientsforthepanelof116countriesarerobusttotheinclusion

ofthefollowingvariables:populationgrowthandsizeofthecountry.Finally,therobustnessofthe

resultsisalsocheckedintheupgradedmodelwiththevariable,representingthepoolof

internationalsavings.

("/$)& = (& + *(+/$)& + ,&. (1)

3

Theremainderoftheresearchhasthefollowingstructure.Thefirstsectionsummarizesempirical

workandresearchwhichfocusonthesolutionsandexplanationsfortheFeldstein-Horiokapuzzle.

Thesecondsectionprovidesthedescriptionofthemethodologyemployedfortheanalysisofthe

relationshipbetweenthesavingsandinvestmentseries.Partthreedescribesthedatausedinthe

researchaswellastheanalysedsubsamples.Thenextsectionprovidesanddiscussestheobtained

empiricalresults.Thelastpartisasummaryoftheresults,conclustions,andsuggestionsforfurther

empiricalinvestigation.

1

1. Literaturereview

TheresultsofFeldsteinandHorioka(1980)havepromptedawidespreaddebateamongscholars

andresearchers.Theoutcomeofthedebateisasizeableempiricalliteraturewhichcomprisesafairly

largemultitudeofexplanationsandsolutionsto“themotherofallpuzzles”(ObstfeldandRogoff,

2000).Oneofthewidelyacceptedandutilizedexplanationsofthepuzzleisbasedonthe

intertemporalcurrentaccountapproach,whicharisesfromthedefinitionofthecurrentaccountas

thedifferencebetweensavingandinvestment.Toderivethecurrentaccountequation,oneshould

firstconsiderthenationalincomeidentitywhichisdefinedinthefollowingway:

whereGispublicconsumption,Cishouseholdconsumption,Iisinvestment,NXisnetexports,ris

theworldrateofinterestandBisthecountry’snetassetposition.Thecurrentaccountisderived

fromthenationalincomeidentityinthefollowingway:

Suchauthors,asCoakleyet.al(1996),Jansen(1997,1998,2000),Olivei(2000),werethefirstones

toclaimthatsincecurrentaccountisdefinedbythedifferencebetweensavingsandinvestment,the

closerelationshipbetweensavingsandinvestmentisarepresentationofthesolvencyconditionor

intertemporalbudgetconstraintandiswronglyinterpretedaslowinternationalcapitalmobility.

Sincedebtcannotexplodeinthelong-run,oneshouldexpectsavingandinvestmenttobe

cointegratedoforderoneandcurrentaccounttobeastationaryprocess.Consequently,duetothe

solvencycondition,thecross-sectionestimatescapturetheunitrootcoefficientratherthanthe

degreeofcapitalmobility,whichisincorrectlyinterpretedasinsignificantcapitalmovements.

Therefore,oneshouldratherfocusonshort-rundeviationswhichcanbeestimatedandconsidered

asameasurementofinternationalcapitalmobility.FollowingtheworkofJansen(1997,1998),

PelgrinandSchich(2004),BangakeandEggoh(2011),andAzalietal.(2014)estimatethe

relationshipbetweensavingandinvestmentusinganerror-correctionframeworktobeableto

distinguishbetweenshort-runandlong-rundynamics.Theauthorsobtainstatisticallysignificant

error-correctioncoefficients,whichconfirmsthepresenceofalong-runcointegrationrelationship

betweensavingandinvestment.Moreover,thescholarsalsoestimatethelong-runcoefficientsand

obtainmixedresults.Ontheonehand,theestimatedlong-runcoefficieintsarenotsiginificantly

differentfromone,whichconfirmsthatcurrentaccountisastationaryprocessandtheintertemporal

$ ≡ / + 0 + " + 12 + 34, (2)

$ − / − 0 − " = + − " = 08 ≡ 12 + 34. (3)

2

budgetconstraintisbinding.Ontheotherhand,somecoefficientsareestimatedtobesignificantly

differentfromone,whichtheauthorsinterpretasthelackofthebindingconditionforthecurrent

accountand,consequently,basedonthesizeofthelong-runcoefficients,theauthorsdiscussthe

degreeofcapitalmoblityinthelongrun.Additionally,theauthorsestablishthatcapitalflowsinthe

shortrunarebecominglargerandlarger,whichisconsistentwiththepredictionsofincreased

capitalmobilityduetoongoingfinancialandinternationaltradeliberalization.Nevertheless,itis

undeniablethatthepuzzleisstillpresent,whichcanbetheoutcomeofvariouseconomicandsocial

factors.Thevalidityandimportanceofthosefactorshavebeenexploredinalargeamountof

literaturewhichwillbefurthersummarizedaccordingtotheauthors’mainpointofargumentor

regionofinterest.Therearescholarswhoclaimthatahighsaving-retentioncoefficientisthethe

resultoftheendogeneityproblemwhicharisesduetotheexistenceofcertainfactorsthataffectboth

savingsandinvestment.Forinstance,savingscouldbecorrelatedwiththeerrortermowingtothe

targetingofthecurrentaccount,commontechnologyandproductivityshocks,countrysizeeffect,the

existenceofimmobiletypesofcapital,andnon-tradedsectorsofproduction.Therearescholarswho

statethatatightrelationshipbetweensavingandinvestmentisaninevitablephenomenonduetothe

presenceofcertaincapitalcontrolsandinvestors’riskawarenesswhichgeneratesahomebiaseffect.

Moreover,onecanalsofindsubsequentresearchwhichattributesthepuzzlingrelationshiptothe

incorrectequationspecificationanddatasampling.Additionally,thepuzzlehasbeeninvestigatedfor

differentperiods(e.g.pre-andpost-BrettonWoodssystem,pre-andpost-MaastrichtTreaty,pre-

andpost-financialcrisis)anddifferentregions(EUandEurozone,G7andNAFTA,East-Asianand

Africancountries,LatinAmericanandCaribbeancountries).

1.1. F-Hpuzzleandfiscalpolicies

WhengovernmentspursueexpansionaryfiscalpoliciesintheworldwithoutRicardianandtax

smoothingassumption,budgetdeficitstendtobenegativelycorrelatedwithinvestment,which

resultsinthe‘crowding-outeffect’.Sincebudgetdeficitsbothnegativelyaffectsavingsthroughthe

decreaseinpublicsavingsandprivateinvestmentthroughthedecreaseintheinvestmentrate,

nationalsavingsandinvestmentturnouttobecorrelated,whichgeneratesendogeneityproblem

and,consequently,biasedpointestimates(Roubini,1988).Moreover,Roubini(1988)criticizesthe

resultsofFeldsteinandHorioka(1980)onthegroundsoftheincorrectequationspecificationand

thelimitedpowerofacross-sectionaltechniqueappliedtothedataset.Theauthoralterstheoriginal

savingequationbyintroducingthebudgetdeficit,whichresultsineitherinsignificantorrelatively

lowsaving-retentioncoefficient.Likewise,Westphal(1983),Summers(1998),andBayoumi(1990)

3

attributeastrongrelationshipbetweensavingsandinvestmenttofiscalpolicieswhichareaimedat

preventingdistortionsincurrentaccountsresultingfromundesirablecapitalinflowsandoutflows.

Capitalinflowsmaycreatedisturbancesonthetradablesectorwhereascapitaloutflowscause

inconveniencesintermsoftaxation.Notwithstanding,GundlachandSinn(1992)challengesthe

resultsofBayoumi(1990)onthebasisofasmallsamplesize.Thescholarsarguethatacross-section

consistingof10OECDcountriesmaybiastheestimatedresults.

1.2. F-Hpuzzleandhomebiaseffect

Inadditiontothefiscalpolicyargument,Tobin(1983)andGolub(1990)confirmtheoriginalresults

ofFeldsteinandHorioka(1980)andpointoutthatweakintegrationoffinancialmarketsstemsfrom

anumberofsocialandeconomicfactorswhichcompriseasymmetricinformation,transactioncosts,

investor’sriskaversion,andexchangeraterisk.Theauthorsclaimthatthesearethefactorsthatare

themainconstraintsontheinternationalfinancialmarket,whichcouldbeanexplanationforthe

surprisingstrongassociationbetweensavingsandinvestment.Thescholarsstatethatitwillbe

unrealistictoexpectfromrationaleconomicagentstochooseforeigninvestmentoverdomesticone

owingtotheaforementionedconstrainingfactors.Similarly,Feldstein(1994),andBovenbergand

Gordon(1996)statesthatrisk-awareness,politicalandcurrencyrisksresultininsignificant

internationalcapitalmobility.Toprovetheirpoint,thescholarsprovidestatisticaldataonAmerican

andJapaneseportfolios,90%ofwhicharestillinvesteddomestically.Theauthorsclaimthatthis

resultshouldn’tcomeasasurprisesinceonlyrisk-neutralorrisk-lovingagentswillchooseto

undertakeforeigninvestmentowingtotheassociatedrisks.GeorgopoulosandHejazi(2005)argue

thateventhoughdomesticbiasisanobviousphenomenon,itbecomeslessrelevantovertime.The

authorsmodifytheoriginalsavingequationbyintroducingthetimetrendinordertocheckthe

validityofhomebiaseffect.Thescholarsobtainresultswhichareinlinewiththeirexpectationsofa

decreasinglocalbiasthroughtime.GeorgopoulosandHejazi(2009)alsoestimatethathomebias

doesn’tonlydecreaseovertimebutalsobecomesrelativelylowwhenapositivecorrelationbetween

inwardandoutwardcapitalflowsisaccountedfor.Additionally,theauthorsfindthatdeveloped

countriesobservethelargestbiascomparedtodevelopingandemergingeconomies.Developing

marketshavethesmallestbiaswhereasemergingeconomiesarefoundtobein-between.

4

1.3. F-Hpuzzleandcountrysizeeffect

Dooleyetal.(1987)arguesthatfornationalsavingstobeexogenous,asetofassumptionsneedsto

holdtrue.First,thereshouldbenovariablesthatexplainbothsavingandinvestment.Second,the

domesticinterestrateshouldbethesameastheworld’srate.Third,theworld’sinterestrateshould

beexogenous,orinotherwords,acountryshouldhavenoeffectontheforeigninterestrate,the

failureofanyofthethreeconditionsresultinastrongassociationbetweensavingandinvestment.

Thethirdassumptionisalsoknownasacountrysizebiaswhichmeansthatarelativelylargecountry

hasaneffectontheworld’sinterestrate,whichresultsintheco-movementsofitsnationalsavings

andinvestmentorinotherwords,endogenoussavings.

ThefailureofthethirdconditionhasbeenalsoempiricallyconfirmedbyMurphy(1984).Afterhe

splitshissampleof17OECDcountriesintotwogroupsintermsofacountrysizeandestimatesthe

saving-retentioncoefficient,hefindsthatlargercountriesobserveacoefficientclosetounity

whereassmallercountriesexhibitacoefficientof0.6.Murphy(1984)drawsaconclusionthata

countrysizeproducesanupwardbiasinthecoefficient.HoandChiu(2001)andHo(2003)confirm

therelevanceofthecountrysizeargumentinexplainingthepuzzle.Theyaltertheoriginalequation

byaddingthesizevariableexpressedintermsofarelativeGNPshare.Thescholarssplitthesample

inthreegroupsandestimatethecoefficientsseparately.Theyfindthatasampleofsmallcountries

withGNPsharebelow0.74%observethelowestcoefficientof0.31.Thesampleofmediumcountries

exhibitacoefficientof0.44.Forthegroupofthelargestcountries,thecoefficientisestimatedtobe

0.74.Basedontheobtainedresults,theauthorsconcludethatthecountrysizeargumentisbinding.

AnalternativeapproachhasbeenutilizedbyBaxterandCrucini(1993)inordertoinvestigatethe

Feldstein-Horiokapuzzle.BaxterandCrucini(1993)constructarealbusinesscyclemodelwithtwo

countriesandoneperiod.Theyfindthattherelationshipbetweensavingsandinvestmentis

dependentonthecountrysizeandtendstobestrongerforcountriesthatarerelativelylarge.

1.4. F-Hpuzzleinthedevelopedanddevelopingcountries

Therehasalsobeenliteraturedevotedtotheinvestigationofbothdevelopedanddeveloping

countries.Themainfindingssuggestthatdevelopedcountriesobservehigherpointestimatesdueto

theirabilitytofinancedomesticinvestmentfromthelargeenoughpoolofdomesticsavingswithout

aneedtorelyoninternationalcapitalmarkets.Theaforementionedresultshavebeenempirically

confirmedbySinhaandSinha(2004),Bahmani-OskooeeandChakrabarti(2005),andChakrabarti

5

(2006)whoconductoneofthemostcomprehensiveresearchesusingthelargestdatasample

consistingofmorethat120countriesovertheperiodof40years.Thescholarsobtainlower

coefficientsfordevelopingcountriesthanfordevelopedones,whichultimatelymakesthemconclude

thatacountrysizebiasispresent.TheirresultshavebeenconfirmedbyMojsoska-Blazevskiand

Petreska(2013).TheauthorsfocusonCentralandEuropeancountries(CEE),Southeasterncountries

(SEE),andCommonwealthofIndependentStates(CIS),withCEEbeingthemosteconomically

developed,CISbeingtheleasteconomicallydeveloped,andSEEbeingin-between.Thescholars

obtainthehighestcoefficientforCEEandthelowestoneforCISasoneshouldexpectifthecountry-

sizebiasisbinding.Oneoftheexplanationsofwhydevelopingcountriesobservelargercapitalflows

hasbeenproposedbyKasuga(2004).Theauthoranalysesthesampleof102countriesandarrivesat

theconclusionthatthetightrelationshipbetweensavingsandinvestmentistheindicatoroffinancial

shortcomingsondomesticmarketsratherthanlimitedcapitalflows.Aftertheauthorsplitsthe

sampleintotwogroups:countrieswithdevelopedandunderdevelopedcapitalmarkets,thescholar

findsthatalowercoefficientarisesinthesampleofcountrieswithrelativelyinefficientcapital

markets.Anotherexplanationwhydevelopingcountrieshavelowersaving-retentioncoefficientshas

beenexploredbyIsaksson(2001).Theauthorclaimsthatlowcoefficientsareobtainednotbecause

ofthehighdegreeofopennesstointernationalcapitalbutratherbecauseoftheomissionofforeign

aidvariablefromtheequation.Whentheauthorintroducesitintotheequation,thedownwardbias

disappearsandsaving-investmentcoefficientsincrease.YounasandChakraborty(2011)confirmthe

aforementionedresultsthatforeignaidputsadownwardbiasonestimatedcoefficients.Whenthe

authorsintroduceforeignaidintotheestimationequation,asaving-retentioncoefficientfor

developingcountriesrises,whichisanindicatorofinsignificantcapitalflows.Analternative

approachhasbeenutilizedbyMaandLi(2016)whoemploycointegrationanalysisandpanel

estimationtechniques.Similartotheaforementionedscholars,MaandLi(2016)obtainhigher

coefficientformoredevelopedcountries.However,theytreattheobtainedresultsnotasanindicator

oflowcapitalmobilityindevelopedcountriesbutratherasanindicatorofstrongsolvency-

adjustmentmechanismforreducingcurrentaccountdistortions.

1.5. F-Hpuzzleandtechnological,productivityanddemandshocks

Asystematicassociationbetweensavingsandinvestmentalsospawnsfrommiscellaneousshocks,

includingtechnological,productivityanddemandshocks,thatmayhittheeconomyandleadtothe

movementsofthetwoseriesinthesamedirection.Forinstance,Finn(1990)arguesthatastrong

correlationbetweensavingsandinvestmentmayariseduetoproductivityandtechnologyshocks

6

evenintheenvironmentofperfectcapitalmobility.Theauthoremploysthedynamicapproachinan

overlappinggenerationmodelwithtwoinfinitely-livedeconomies,domesticandforeign,and

finitely-livedagents.Thescholarobtainssimulationresultswhichindicatethatahighsaving-

retentioncoefficientariseseveninthepresenceofcapitalmobilityduetotheinnovationsin

domesticandforeigntechnologies.ShibataandShintani(1998)applyapermanentincomemodelas

analternativemodeltoestimatethedegreeofcapitalflows.Insteadoffocusingonasaving-

investmentrelationship,theauthorsanalysetherelationshipbetweenconsumptionandnetoutput.

Theyarguethatthereshouldbenoassociationbetweenconsumptionandoutputinthepresenceof

capitalmobility.Theyshowthatevenwhentechnologyshocksarepresent,morethanhalfofthe

sampleobservescapitalmobility.Theauthorsexplainthelackofcapitalmobilityfortherestofthe

samplecountriesduetotheexistenceofcapitalcontrolsduringtheanalysedperiod.Likewise,

GiannoneandLenza(2004)arriveatasimilarconclusionthatglobalshocks,suchastechnologyand

productivityshocks,produceanupwardbiasinpointestimates.Whentheauthorsutilizeageneral

equilibriumapproachandremovetheassumptionofhomogeneouseffectofglobalshocks,they

obtainsaving-retentioncoefficientswhicharesignificantlylowerthantheonesestimatedby

FeldsteinandHorioka(1980).TheimportanceofglobalshocksfortheexplanationoftheFeldstein-

HoriokapuzzlehasalsobeenconfirmedbyChangandSmith(2013)andCostantiniandGutierrez

(2013).Similartothepreviousrelatedresearch,theauthorsarriveataconclusionthatastrong

associationbetweensavingsandinvestmentispartlyattributedtoproductivityandtechnology

shocksratherthancapitalimmobility.Anothertypeofshocksthatcouldexplainapuzzling

relationshipbetweensavingsandinvestmentisdemandshocks(Wen,2007).Wen(2007)claimsthat

technologyshocksarenotsufficientenoughtoexplainco-movementsineconomicactivitiesacross

countries.Sinceariseindomesticdemandaffectsnotonlydomesticeconomybutalsoforeign

economythroughnetexportdemand,economicactivitiestendtosynchronizeinternationally.Thus,

correlationsbetweendomesticsavingsandinvestmentarise,whichiswronglyinterpretedascapital

immobility.

1.6. F-Hpuzzleandimmobilecapital

Barroetal.(1995)supportstheideathatcertaintypesofimmobilecapital,includinghumancapital,

biastheempiricalassociationbetweensavingandinvestmenteveninthepresenceofflowsofmobile

typesofcapital.Theauthoraltersthetraditionalneoclassicalgrowthmodelbyaddinghumancapital

toshowthatdespitetheoreticalpredictionsoffastconvergenceinoutputandincomepercapitain

openeconomies,thespeedofconvergencewillbelowersincehumancapitalcannotbeborrowed

7

fromtheinternationalmarketandneedstobefinanceddomestically.Therefore,ahighsaving-

investmentestimateisexpectedtoariseevenwhenfinancialmarketsarewellintegrated.Likewise,

Xie(1998)developsanendogenousgrowthmodeltoshowthattwofactors,humancapitalandnon-

tradablegoods,canproducehighpointestimates.Incaseofhumancapital,itimprovesinvestment

ratesduetoanenhancedpaceofinnovation,whichincreasestheflowofundertakeninvestment.

Additionally,incountrieswithhighamountsofhumancapital,savingratesaregenerallyhigherdue

tothestrongerpreferenceforsavingoverconsumptionowingtoconsumptionsmoothingbehavior

ofagents.Asfornon-tradablegoods,similarlytoEngelandKletzer(1989),theauthorsstatethatthe

Feldstein-Horiokaparadoxarisesowingtothefactthatintheeconomy,wheresavingsincrease,

consumptionofnon-tradablesdecreases,whichresultsinlowerproductionofnon-tradablegoods.

Consequently,thelaborinthenon-tradedsectordrops,whichfurtherreducestheproductionofnon-

tradables.Asaresult,themarginalproductivityofcapitalincreasesand,consequently,theeconomy

observesariseinthedemandforcapital,whichproducesastrongsaving-retentioncoefficient.Wong

(1990)hasalsoshownthattheexistenceoftheFeldstein-Horiokapuzzlecanbeattributedtothe

presenceofanon-tradedsectorintheeconomy.Whensavingratesrise,agentspostponetheir

consumptiontoenjoyincreasedconsumptioninthefuture.However,inordertoraisethe

consumptionofnon-tradedgoods,thedomesticproductionshouldrise,whichrequireslarger

investmentintherelatedproduction.Thus,savingandinvestmenttendtobecorrelated.

1.7. F-Hpuzzleandcapitalcontrols

Eventhoughtherehasbeenasharpreductionofcapitalcontrolacrosscountries,governmentsstill

implementcapitalcontrolsasapartoftheirprotectionistpolicies.Suchpoliciesareimposedinorder

toreduceeconomicfluctuationsandimproveGDPgrowthprospects.Thisargumenthasbeen

activelysupportedandempiricallyanalysedbyFeldstein(1983),Feldstein(1992),andSummers

(1988).ÖzmenandParmaksiz(2003a)arguethattheoriginalresultsofFeldsteinandHorioka

(1980)couldbebiasedduetothepresenceofendogenousstructuralbreak.Theauthorsanalysethe

UK’seconomyandtheeffectoftheremovalofforeignexchangecontrolsin1979.Thescholarsobtain

twocoefficientsfortheperiodsbeforeandafter1979.Theresultsindicatethatthepuzzleispresent

intheformerperiodwhichischaracterizedbyextensivecapitalcontrols.However,thepuzzle

disappearsafter1979whenthegovernmentabolishedrestrictionsoncapitalmobility.Özmenand

Parmaksiz(2003b)employthesameestimationtechniquetocheckthevalidityoftheFeldstein-

HoriokapuzzleforFranceinthepresenceofanendogenousstructuralbreak.Similartotheresults

fortheUK,theauthorsobtainasignificantlydecreasedsaving-investmentcoefficientafter1973,or

8

theintroductionofflexibleexchangerateregime,whichconfirmstheirpredictionthattheabolition

ofcapitalcontrolscanbeasolutiontothepuzzle.GuzelaandOzdemirb(2011)examinecapital

mobilityinJapanandUSA.Theauthorsfindthatiftheyaccountforstructuralbreaks,whichincase

ofJapancoincidewiththeabolitionoftheBrettonWoodssystemandeconomicbubbleof1983,and

incaseofUSA–Reagan’spresidencyaccompaniedbylargebudgetandcurrentaccountdeficits,the

puzzledisappears.Therefore,theauthorsconcludethatthepresenceofstructuralbreaksputsan

upwardbiasonsaving-retentioncoefficients.

1.8. F-HpuzzleafterandbeforetheBrettonWoodssystemandMaastrichtTreaty

ThedegreeofcapitalmobilityaftertheabolitionoftheBrettonWoodssystemandtheintroduction

oftheMaastrichtTreatyhasalsobeenestimatedandinvestigatedbyanumberofscholars.For

example,Kumaretal.(2010)andKumarandRao(2011)analysethesampleof13OECDcountries.

TheyconfirmtheresultsofÖzmenandParmaksiz(2003b)thatthepuzzlingrelationshipbetween

savingandinvestmentdecreasessignificantlyinthepost-BrettonWoodsperiod.Additionally,the

authorsfindasimilareffectonthesaving-investmentcoefficientsaftertheintroductionofthe

MaastrichtTreaty.HolmesandOtero(2014)utilizecrosscorrelatedeffectsmeangroup(CCEMG)

estimatortoaccountforendogeneityproblem.Whentheauthorscontrolforstructuralbreaks,which

coincidewiththeabolitionoftheBrettonWoodssystemandenforcementoftheMaastrichtTreaty,

thecoefficientdropsdownto0.179,whichisconsistentwithhighcapitalmobility.Ketenci(2012),

ChenandShen(2015),KatsimiandZoega(2016)analysethesampleofcountries-membersofthe

EuropeanUnionandEurozonetocheckwhethertheestablishmentoftheEuropeansinglemarket

andthecommoncurrencyhadapositiveeffectonthedegreeofcapitalmobility.Theauthorsconfirm

empiricallythattheremovalofcapitalcontrolsandintroductionofeurosignificantlyimprovedthe

situationontheEuropeanfinancialmarket,whichisrepresentedbyloworstatisticallyinsignificant

saving-retentioncoefficients.

1.9. F-Hpuzzleinthespecificregionsandeconomicareas

Capitalmobilityhasalsobeenestimatedforspecificregionsandeconomicareas.Forinstance,

MohammadandMohammad(2010)makeanattempttoutilizethetheoryoftheintertemporal

budgetconstrainttomeasuretheextentofcapitalmobilityinEuropeancountries.Theauthors

constructanerrorcorrectionmodeltodistinguishbetweenshort-andlong-runcapitalmobility.

Theyfindalong-runcointegratingrelationshipbetweensavingsandinvestment.Thescholarsalso

9

observethattheestablishmentoftheEurozonehassignificantlycontributedtotheliberalizationof

capitalflowamongmemberstates.Guillaumin(2009)alsoutilizesrecentlydevelopedpanel

estimationinstrumentstocheckthevalidityofthepuzzleforEast-Asiancountries.Similarto

MohammadandMohammad(2010),thescholarfindsthatsavingandinvestmentarecointegrated

series.Theauthorobtainstheresultsthatindicateastrongerfinancialintegrationafterthefinancial

crisisof1997amongmoredevelopedcountriesofEastAsia.Similareconometrictechniqueshave

beenappliedtothesampleof14LatinAmericanand5CaribbeancountriesbyMurthy(2009).The

authorconfirmstheexistenceofacointegratingrelationshipbetweensavingandinvestment,and

estimatesthatcapitalismoderatelymobileintheshort-run.BangakeandEggoh(2011)analysethe

largestsampleof37Africancountries.Theauthorsfindthatsavingandinvestmentarecointegrated

oforderone.Theauthorsobtainlowpointestimateswhichtheyinterpretashighcapitalmobility.

Additionally,thescholarsestablishthatcommon-lawcountriesobserveahigherdegreeofcapital

mobilitythancivillawcountries.Gil-Alanaetal.(2016)alsoinvestigatethesampleofSouthAfrican

countriesforthepresenceofthepuzzle.Theauthorsfindacointegratingrelationshipbetween

savingandinvestmentbeforethefinancialliberalization.However,theydon’tobservecointegration

afterthederegulation,whichtheyinterpretasincreasedcapitalmobility.Contrarytotheresultsof

theaforementionedworks,NarayanandNarayan(2010)haven’tfoundacointegratingrelationship

betweentheseriesforG7countries.Theauthorinterpretsnocointegrationasfreemovementof

capitalamongG7countries.Noevidenceofcointegrationbetweentheseriescountrieshasalsobeen

foundbyKetenci(2010)forG7,EU15,andNAFTA.Azalietal.(2014)utilizethedynamicfixedeffect

(DFE)andpooledmeangroup(PMG)estimatorstomeasuretheextentofcapitalmobilityfor21

OECDand17non-OECDcountries.Thescholarsobtaincoefficientsof0.93and0.16forOECDand

non-OECDcountries,respectively.Theauthorsconcludethatcapitalmobilityislowerindeveloped

countriesthanindevelopingcountries,whichcontradictsexpectationsofincreasedcapitalmobility

inOECDcountrieswithongoingfinancialliberalization.Thus,theauthorsquestiontheadequacyof

saving-investmentcoefficientasameasureofcapitalmobility.SimilartoAzalietal.(2014),Drakoset

al.(2017)applyPMGandMGestimatorstocheckthedegreeoffinancialliberalizationfor14EU

countries.Theauthorsfindatightassociationbetweensavingandinvestmentinthelong-run,which

isanevidenceforabindingsolvencyconstraint.Thescholarfindsthatcapitalmobilityishighinthe

short-runanddecreasesovertime.

10

1.10. F-Hpuzzleandthefinancialcrisisof2008

Therecentfinancialcrisishasdrawnalotofattentionofeconomistsandpoliticians.Therehavebeen

numerousattemptstomeasuretheeffectsofthecrisisoneconomicgrowth,monetarysystem,public

debt,tradebalance,etc.oneofthefirstattemptstoestimatetheeffectofthecrisisoncapitalmarkets

andFeldstein-HoriokapuzzlehasbeenmadebyJohnsonandLamdin(2014).JohnsonandLamdin

(2014)trytomeasuretheeffectofthefinancialcrisisforEU27.Theauthorsestimatethesaving-

retentioncoefficientsfor3periods:pre-crisis,crisis,andpost-crisis.Thescholarsfindthatthelargest

dropincapitalmobilityoccurredatthepeakofthecrisis,andtheydon’tobtainanyevidencefor

decreasedcapitalmobilityinthepost-crisisperiod.ButandMorley(2016)comparethepre-crisis

periodwiththepost-crisisperiod.ContrarytotheresultsofJohnsonandLamdin(2014),theauthors

findthatcapitalmobilitywashigherbeforethecrisisduetodecreasedinvestors’toleranceforrisk.

Additionally,thescholarsfindthatnetcapital-importingcountriesobservedhighercapitalvolatility,

whichcouldexplainwhythosecountriesexperienceadeeperrecession.

11

2. Methodology

2.1. Unitroottests

Beforeproceedingtocointegrationanalysis,itisessentialtochecktheseriesfornon-stationarityor

thepresenceofaunitrootinordertodeterminetheorderofintegration.Indoingso,agroupoffirst-

generationpanelunitroottestshavebeenutilized.Thegroupoffirst-generationtestsisrepresented

byLLC(Levinetal.,2002),IPS(Imetal.,2003),ADFandPPFishertestsproposedbyMaddalaand

Wu(1999)andChoi(2001),Breitung(Breitung,2000),andHadritests(Hadri,2000).Levin-Lin-Chu

(LLC),Breitung,andHadriarepanelunitroottestswhichimposeanassumptionofhomogeneityby

restrictingallcross-sectionstoacommonunitrootprocess.Levin-Lin-ChuandBreitungtestscheck

thenullhypothesisofaunitrootornon-stationaritywhereasHadritestschecksthenullhypothesis

ofnounitrootorstationarity.IPS,ADFandPPFishertestsrelaxtheassumptionofhomogeneity,

imposedbytheprevioustests,andallowcross-sectionstofollowindividualunitrootprocesses.IPS

testletsbothconstantandslopetermsdifferacrosscross-sectionswhereasADFandPPFishertests

combinep-valuesofindividualunitrootcoefficients.IPS,ADFandPPFishertestscheckthenull

hypothesisofaunitrootagainstthealternativehypothesisofnounitroot.Alltheaforementioned

first-generationunitroottestshavethedrawbackofassumingcross-sectionalindependence.

However,cross-sectionaldependenceisunavoidableinmostcasesduetounobservedcommon

factorsandmacroeconomicdynamics.Therefore,newpanelunitroots,namelysecond-generation

unitroottests,havebeendevelopedinordertoovercomethelimitationofcross-sectional

independenceassumedbythefirst-generationtests.OneofthemostfamoustestistheCross-

SectionalAugmentedIPS(CIPS)developedbyPesaran(2005).Inordertoobtainanequationforthe

panelunitroottest,Pesaran(2005)estimatesthefollowingequation,usingOLSestimator:

where∆:;isthecross-sectionalmeanof:&; ,and:;<=isthelaggedvalueofthecross-sectionalmean.

>&(1, ?)istheestimatedt-valuesof*& coefficientusedforobtainingindividualADFstatistics.Thepanel

unitroottestisestimatedbyaveragingindividualADFstatistics:

∆:&; = (& + *&:&,;<= + @&:;<= + @&A∆:&,;<A

B

ACD

+ ∆:&,;<=

B

ACD

+ ,&;,(4)

CIPS(N,T)= =E >&(1, ?)E

&C= . (5)

12

Thetest’scriticalvaluesaregivenbyPesaran(2005).

2.2. Cointegrationanalysis

Oncetheorderofintegrationisknown,cointegrationanalysiscanbeundertakeninordertovalidate

thepresenceofthelong-runrelationshipbetweenthesavingandinvestmentserieswhichis

requiredforthesolvencyconditionofthecurrentaccount.Inordertodetermineacointegrating

relationship,Pedroni’s(1999)sevenresidual-basedtestshavebeenimplemented.LikeIPS,ADFand

PPFishertests,Pedroni(1999)avoidtheunrealisticassumptionofhomogeneitybyallowing

interceptsandtrendcoefficientstodifferacrossindividualmembersofthepanel.Pedroni’s

cointegrationanalysisstartswiththeestimationofthefollowinglong-termrelationship:

fort=1,…,T;i=1,…,N;whereTisthenumberoftimeobservations;andNisthenumberofcross-

sectionalunitsinthepanel.(& andF& areindividualandtrendeffects.Thenullhypothesisistestedby

checkingwhethertheresidualsareintegratedoforderone.Todoso,thefollowingequationsis

estimated:

or

foreachindividualmemberofthepanel.Underthenullhypothesisofnocointegration,G&isnot

statisticallydifferentfrom1.Pedroni’shasdevelopedsevendifferentstatisticstocheckthenull

hypothesis.Theyaredividedintotwogroups:fourwithin-dimensionorpanelstatistics,whichare

basedonthehomogenoushypothesis(G& = G < 1foralli),andthreebetween-dimensionorgroup

statistics,whicharebasedontheheterogeneoushypothesis(G& < 1foralli).Pedronishowsthatthe

sevenstatisticsareasymptoticallynormallydistributedandprovidesthefinitesampledistribution

obtainedviaMonteCarlosimulations.

("/$)&; = (& + *&(+/$)&; + F&> + ,&;, (6)

,&; = G&,&;<= + J&;, (7)

,&; = G&,&;<= + K&;∆

LM

AC=

,&;<A + N&;,(8)

13

2.3. Panelestimation

Inordertoanalysethesaving-investmentrelationship,twodifferentapproacheshavebeenutilized.

Thefirstapproachisbasedona‘traditional’panelerror-correctionmodel,proposedbysuchscholars

asJansen(1997,1998),PelgrinandSchich(2004),BangakeandEggoh(2011),Azalietal.(2014),

andDrakosetal.(2017).Thesecondapproachisamodificationofthefirstmodelwhichincludes

fixingofthelong-runcoefficientatthevalueofonewhichisrequiredbythesolvencyconditionofthe

currentaccount.Themainfocusofthisresearchisonthesecondapproach.

2.3.1. ApproachI:conventionalerror-correctionframework

Anerror-correctionapproachhasbeenwidelyusedbythescholarssinceitallowstodistinguish

betweenshort-termandlong-termdynamicswhichcanbefundamentallydifferentfromeachother.

Forinstance,thelong-runcoefficientrepresentsthedegreeofcapitalmobilityinthelongrunand

willvarydependingonhowperfectlymobilethecapitaliswhereastheshort-runcoefficient

representsadjustmentstovariousshocksintheeconomyandisexpectedtobeequalorclosetozero.

Intheshort-run,countrieswilleitherimportorexportcapital,dependingonthenatureofshockor

economicfactors.Inordertoestimatetheshort-runandlong-rundynamicsjointly,anautoregressive

distributed-lagmodelproposedbyPesaranetal.(1996)hasbeenused.Theestimatederror-

correctionmodelisanimprovedversionofthemodeldevelopedbyJansen(1996,1998)whoutilizes

time-seriesandpoolingapproaches.Thenewmodelcombinesbothcross-sectionalandtime-series

dimensions,whichreducesthehomogeneityassumptionimposedbythepoolingtechnique.Inorder

toestimatethemodel,Pesaran’s(2006)CommonCorrelatedEffectsMeanGroup(CCEMG)estimator

isutilized.TheCCEMGestimatorhasanobviousadvantageoverotherestimators,whichisitsability

toaccountforthecross-sectionaldependencebyintroducingthecross-sectionalaveragesofboth

dependentandindependentvariablesasadditionalregressors.Suchregressorshavenomeaningful

interpretationandareincludedtocontrolfortheunobservedcommonfactors.

Incasesavingandinvestmentarefoundtobeintegratedoforderoneandcointegrated,theerror

termsareexpectedtobeintegratedoforderzeroforallcross-sectionalunitsandareindependently

distributedacrosstimedimension.Inordertoconstructtheautoregressivedistributed-lagmodel,

thelagofonehasbeenchosenforallthevariables.Thechoiceisbasedontheliteratureonthe

saving-investmentrelationship.Havingsetthelengthofthelag,theautoregressivedistributed-lag

model,ARDL(1,1)isrepresentedbythefollowingequation:

14

where("/$)&;and(+/$)&;aregrosscapitalformationasashareofGDPandgrossdomesticsavingas

ashareofGDPrespectively.

Thefinalerror-correctionrepresentationoftheerrorcorrectionequationisasfollows:

where*D& =OM

=<PM,Q& = −(1 − R&),and*=& =

STMUSVM=<PM

.Q& isthecoefficientsthatmeasurethespeedof

adjustmentofsavingandinvestmenttotheirlong-runequilibrium,*=& isthelong-runmeasurement

ofcapitalmobility,andF=& istheshort-termmeasurementofcapitalmobility.W;istheunobserved

commonfactorandX&Yistheheterogeneousfactorloading.i;, i; = ("/$;, +/$;),includesthecross-

sectionalmeansofthegrosscapitalformationasashareofGDPandgrossdomesticsavingsasa

shareofGDP.Sincethelaggeddependentvariableisnotstrictlyexogenousandiscorrelatedwiththe

errorterm,theestimateturnsouttobeinconsistent.However,accordingtoChudikandPesaran

(2015),theconsistencyisachievedwhenthenumberofcross-sectionalmeansissetatjk = ?l ,

whichforthisequationisequaltothree,jk = 38l ≈ 3.TheMeanGroupestimatorsareobtainedin

thefollowingway:pqr ==E

p&E&C= withp& = Q&, F& .

Givenequation10,thesteady-stateequilibriumincountryiisdefinedas:

IncaseQ& isfoundtobenotstatisticallysignificantfromzero,itcanbeultimatelyconcludedthat

thereisnolong-runassociationbetweensavingandinvestment,whichcouldbeconsideredas

evidenceofhighcapitalmobilityacrosscountries.However,ifQ& isestimatedtobestatistically

significantfromzero,itcanbeconcludedthattherelationshipbetweensavingandinvestmentexists

inthelong-run;thus,oneshouldproceedtotheanalysisofthelong-termcoefficients*=&Thereare

twocasesregardingthevaluesofthelong-termcoefficients*=& .If*=& = 1,thenthecurrentaccountis

equalto−*D& inthelong-run:(08/$)& = (+/$– "/$)& = −*D&.Thesavingandinvestmentseries

("/$)&; = t& + FD&(+/$)&; + F=&(+/$)&,;<= + R&("/$)&,;<= + ,&;, (9)

∆("/$)&; = Q&(("/$)&,;<= − *D& − *=&(+/$)&,;<=) + F=&∆(+/$)&; + u&,vY i;<v +

wx

vCy

,&;,(10)

,&; = X&YW; + z&; , (11)

Q&(("/$)&,;<= − *D& − *=& +/$)&,;<= = 0 (12)

15

formthecointegratingvectorof(1,-1).Thus,thecurrentaccountisastationaryvariable,fluctuating

arounditslong-termvalueof−*D& .If*D& = 0,currentaccountfluctuatesaroundzerointhelongrun.

Thus,onemayconcludethattheintertemporalbudgetconstraintisbindinginthelong-runandthere

isnocapitalmobilityinthelongterm.

If*=& ≠ 1,thenthecurrentaccountisequalto−*D& + (1 − *=&)(+/$)&.Therefore,thesavingand

investmentseriesformthecointegratingvectorof(1,-*=&).Consequently,thecurrentaccountisa

non-stationaryvariable.Sincethecurrentaccountcanbenon-stationaryonlyinthepresenceof

capitalmobility,onemayconcludethattherearecapitalmovementsacrossthecountriesinthe

sample.

Asfortheshort-termcoefficients,F=& ,iftheyareestimatedtobeequalorclosetozero,onecould

concludethatcapitalmobilityishighintheshortrun.However,iftheshort-termcoefficientsare

greaterthanzero,itcanbeconcludedthatthepresenceofcapitalmobilityintheshorttermcannot

beconfirmed.

2.3.2. ApproachII:alternativemodel

Accordingtotheconventionalapproach,thelong-runsaving-retentioncoefficientshavedifferent

interpretationsdependingontheirvalue.Whentheestimatedlong-runsaving-retentioncoefficients

aredifferentfromone,theyareconsideredtobeanindicatorforthedegreeofcapitalmobilityinthe

longrun.Thelowerthevalueofthecoefficientis,themorecapitalmobilityonecountryorgroupof

countriesobserve.SuchaninterpretationoriginatesfromthefundamentalworkofFeldsteinand

Horioka(1980)andhasbeenwidelyacceptedandutilizedbyscholars.Inmostcases,thelong-run

coefficientshavebeenestimatedtobeclosetoone,whichhavebeeninterpretedaslowcapital

mobility.However,Coakleyet.al(1996)havesuggestedthatthelong-runcoefficientshouldn’tbe

consideredasameasureofcapitalmobilitybutratheranindicatorofthesolvencyconstraint;thus,

oneshouldexpectittobeequalorclosetoone.The‘new’interpretationofthelong-runcoefficient

hastriggeredthemindsofscholars,whichhasresultedintoalargemagnitudeofrelatedresearch

focusingontheestimationoferror-correctionmodelsorthe‘conventional’modelsasawayof

distinguishingbetweenshort-runandlong-runcapitaldynamics.Whenevertheestimatesofthe

long-runcoefficientsareclosetoone,itisconcludedthattheintertemporalbudgetconstraintis

bindingforthecountryorgroupofcountries.However,whenevertheestimatesofthelong-run

coefficientsdifferfromone,thelong-runcoefficientsstoprepresentingthesolvencyconditionand

16

becomeameasureofthedegreeofcapitalmobilityinthelongrun.Inordertoavoidsuchaconfusing

interpretationofthelong-runcoefficient,analternativeapproachisutilizedinthisresearch.Since

currentaccountisdefinedasthedifferencebetweensavingsandinvestment,thelong-run

relationshipbetweensavingsandinvestmentrepresentstheintertemporalbudgetconstraint.The

long-runcoefficient,thus,indicatesthesolvencyconditionofthecurrentaccountandshouldbeequal

orclosetoone.Inordertoabidetheintertemporalbudgetconstraint,thelong-runcoefficient*=& has

beenfixedatthevalueofone.ThenewmodelisestimatedusingPesaran’s(2006)Common

CorrelatedEffectsMeanGroup(CCEMG)estimator.Themodelisanimprovedversionofthe

traditionalmodelsinceitaccountsexplicitlyfortheintertemporalbudgetconstraint.Theimproved

equationtakesthefollowingform:

i;, i; = ("/$;, ("/$ − +/$);<=, +/$;),includesthecross-sectionalmeansofthegrosscapital

formationasashareofGDP,grossdomesticsavingsasashareofGDP,andthedifferencebetween

grosscapitalformationandgrossdomesticsavings.

Thenewmodelisbasedontheassumptionthatthesolvencyconstraintisbindingsothatthelong-

runcoefficientisequaltoone,*=& = 1,andthecurrentaccountfluctuatesaroundzerosothat*D& = 0

inthelongrun.Inthenewmodel,theconvergenceparameterQ& indicatesthedegreeofcapital

mobility.Whencapitalmobilityisperfect,oneshouldexpecttheimbalanceofthecurrentaccountor

thedifferencebetweensavingsandinvestmenttoremainforalongperiodoftimewithoutreversing

immediatelytoitslong-runvalueofzero;inotherwords,thecoefficientQ& shouldbeequalorclose

tozero.Thegapcanstayforlongerperiodsoftimeduetoongoingcapitaltransactionswhicharenot

preventedbyanycapitalconstraints.Intheworldwithperfectcapitalmobility,domesticsavingsand

investmentwillkeeponmovingacrosscountriesinsearchofbetterratesofreturnandinvestment

opportunities,whichwillsustaindomesticcurrentaccountdisequilibriumforalongperiod.When

capitalmobilityislow,thecurrentaccount,definedasthedifferencebetweensavingsand

investment,willreverseimmediatelytoitslong-runvalueofzero;inotherwords,thecoefficientQ&

shouldbebeequalorclosetominusone.Intheworldofimperfectcapitalmobility,domesticsavings

anddomesticinvestmentwillremaininsideoftheirhomeeconomies,whichmeanstheadjustment

∆("/$)&; = Q&(("/$) − (+/$))&,;<= + F=&∆(+/$)&; + u&,vY i;<v +

wx

vCy

,&;,(13)

,&; = X&YW; + z&; , (14)

17

mechanismofthecurrentaccountwillhavetheimmediateeffectandwillresolveanydisequilibrium

onthedomesticfinancialmarketinashorttime.

ThecoefficientF=& isstillameasurementofshort-runcapitalmobilityandrepresentsadjustmentsto

variousshocksintheeconomy.Likewise,inthepreviousspecificationofthemodel,iftheshort-run

coefficientisestimatedtobeequalorclosetozero,onecouldconcludethatcapitalmobilityishighin

theshortrun.Ontheotherhand,iftheshort-termcoefficientislargerthanzero,thepresenceof

capitalmobilityintheshorttermstillremainstobeapuzzle.

2.4. Panelestimation:additionalvariablesofpopulationgrowthandsizeofthecountry

Inordertoseewhetherthesizeoftheshort-termandlong-termsaving-retentioncoefficientswillbe

affectedaftercontrollingforthevariableswhich,whenomitted,canpotentiallyputabiasonthe

relationshipbetweenthetwoseries,anumberofvariableshavebeenintroducedintotheestimating

equation.FollowingtheworkofPetreskaandMojsoska-Blazevski(2013),suchvariables,as

populationgrowthandsizeofthecountry,havebeenintroducedintoboththetraditionaland

alternativeequationstoobserveifthevariablesaffectthesizeoftheshort-termandlong-term

coefficients.

2.4.1. ApproachI

Theupgradedversionofthetraditionalerror-correctionmodelisobtainedinthefollowingway.

Withthemaximumofonelagforeachvariable,thenewautoregressivedistributed-lagmodelhasthe

followingform:

where}/&;standsforannualpopulationgrowthand0+&;standsforacountrysizerepresentedasa

logarithmofGDP.

Thefinalerror-correctionrepresentationofthemodifiederrorcorrectionequationisasfollows:

("/$)&; = t& + FD&(+/$)&; + F=&(+/$)&,;<= + ~D&}/&; + ~=&}/&,;<= + uD&0+&; + u=&0+&,;<=

+ ("/$)&,;<= + ,&;,

(15)

18

i; = ("/$;, +/$;, }/;, 0+;).

2.4.2. ApproachII

Theupgradedversionofthealternativemodeltakesthefollowingform:

i; = ("/$;, ("/$ − +/$);<=, +/$;, }/;, 0+;).

Variableshavethesameinterpretationasinthepreviousspecificationoftheestimatedmodel.

2.5. Panelestimation:additionalvariablesofglobalsavings

Anotherpossibleexplanationforlowcapitalmobilityacrosscountriescouldbeborrowedfromthe

literatureonconsumptionrisksharing.Fromatheoreticalperspective,intheworldwithperfect

internationalrisksharing,domesticconsumptionshouldbeinsensitivetoidiosyncraticreal

demographic,fiscal,andmonetaryshocks(Fulekyetal.,2013).Theconventionalapproachto

measuringconsumptionrisksharinginvolvesestimationofthefollowingequation:

where0&;isaconsumptionincountryi,0&;isanaggregatemeasureofconsumption,and2&;isan

idiosyncraticvariable.Incaseofperfectrisksharing,X&� isexpectedtobeclosetoonewhile*& is

expectedtobezero.Inotherwords,perfectrisksharingimpliesthatagents’endowmentsshouldn’t

beaffectedbyidiosyncraticshocks,andconsequently,consumptionshouldremainunchanged.

However,domesticandinternationalconsumptionshouldmoveinthesamedirection.Likewise,in

caseofperfectinternationalcapitalmobility,oneshouldexpectnorelationshipbetweensavingsand

investmentintheshortrun.However,domesticinvestmentshouldbesensitivetotheglobalpoolof

savings.Incaseofperfectcapitalmobility,thereshouldbenorelationshipbetweendomestic

investmentanddomesticsavingsbutdomesticinvestmentshouldpositivelydependonthe

internationalpoolofsavingsasasourceoffinancingdomesticinvestmentprojects.Inordertosee

∆("/$)&; = Q&(("/$)&,;<= − *D& − *=&(+/$)&,;<= − *Ä&}/&,;<= − *Å&0+&,;<=) + F=&∆(+/$)&;

+ ~=&∆}/&; + u=&∆0+&; + u&,vY i;<v +

wx

vCy

,&;,

(16)

∆("/$)&; = Q&(("/$) − (+/$))&,;<= + F=&∆(+/$)&; + ~=&∆}/&; + u=&∆0+&; + u&,vY i;<v +

wx

vCy

,&;,(17)

0&; = (& + X&�0&; + *&2&; + ,&;, (18)

19

whetherintroductionofthenewvariable,globalsavingsasanaggregatemeasureofsavings,could

alterthesaving-investmentrelation,bothtraditionalandalternativeequationshavebeenupdated.

2.5.1. ApproachI

Theupgradedversionofthetraditionalerror-correctionmodelisobtainedinthefollowingway.

Withthemaximumofonelagforeachvariable,thenewautoregressivedistributed-lagmodelhasthe

followingform:

where(+/$);isanaggregatemeasureofsavings.

Thefinalerror-correctionrepresentationofthenewerrorcorrectionequationisasfollows:

i; = ("/$;, +/$;).

2.5.2. ApproachII

Theupgradedversionofthealternativemodeltakesthefollowingform:

i; = ("/$;, ("/$ − +/$);<=, +/$;).

Variableshavethesameinterpretationasinthepreviousspecificationoftheestimatedmodel.

("/$)&; = t& + FD&(+/$)&; + F=&(+/$)&,;<= + ÇD&(+/$); + Ç=&(+/$);<= + R&("/$)&,;<= + ,&;,(19)

∆("/$)&; = Q&(("/$)&,;<= − *D& − *=&(+/$)&,;<= − *Ä&+$);<=) + F=&∆(+/$)&; + Ç=&∆

+$);

+ u&,vY i;<v +

wx

vCy

,&;,

(20)

∆("/$)&; = Q&(("/$) − (+/$))&,;<= + F=&∆(+/$)&; + Ç=&∆(+/$); + u&,vY i;<v +

wx

vCy

,&;,(21)

20

3. Data

Annualdatafortheperiodof1980-2017havebeenretrievedfromtheWorldBankdatabase-World

DevelopmentIndicatorsandInternationalMonetaryFund-IMFDatafor116countries.Following

theworkofFeldsteinandHorioka(1980),savingsaremeasuredbydomesticsavingasapercentage

ofGDPwhereasinvestmentisdefinedasgrossinvestmentasapercentageofGDP.Followingthe

studiesofMojsoska-Blazevski(2013)andIsaksson(2001),opennessoftheeconomyismeasuredas

trade(exportsandimports)asashareofGDP,populationgrowthisexpressedinalogarithmicform,

sizeofthecountryismeasuredasalogarithmofGDP,andforeignaidisexpressedasashareofGDP.

Thedegreeofcapitalmobilityhasalsobeenestimatedinsub-samplestoseewhethercapital

movementsareaffectedbythefollowingfactors:thedegreeofeconomicdevelopment;theextentof

economicintegrationintradeareas,customsunions,andeconomicunions;internationalpolitical

andeconomicevents,suchastheMaastrichtTreatyandtheglobalcrisisof2008.Thefollowing

subsampleshavebeenconsidered:

Table1.Thelistoftheanalysedsubsamples,numberofcountries,andtimeperiods.

Subsample Numberofcountries Period

Worldpanel 116countries 1980-2017Economicdevelopment

Developedeconomies 27countries 1980-2017Developingeconomies 79countries 1980-2017

OECDmembership

OECDcountries 30countries 1980-2017Non-OECDcountries 86countries 1980-2017

EuropeanUnion(EU) 21countries 1980-2017EuropeanEconomicArea(EEA)+Switzerland 24countries 1980-2017TheMaastrichtTreaty

Pre-Maastrichtperiod 12countries 1980-1993

Post-Maastrichtperiod 12countries 1994-2017

NorthAmericanFreeTradeAgreement(NAFTA) 3countries 1980-2017GroupofSeven(G7) 7countries 1980-2017AsiaandthePacific 28countries 1980-2017AssociationofSoutheastAsianNations(ASEAN) 8countries 1990-2016LatinAmericaandtheCaribbean 25countries 1980-2017LatinAmericanFreeTradeAssociation(LAFTA) 11countries 1980-2017AndeanCommunity 5countries 1980-2017MERCOSUR 4countries 1980-2017Africa 37countries 1980-2017

2008crisisPre-2008crisis 116countries 1980-2007Post-2008crisis 116countries 2008-2017

21

4. Results

4.1. Thepanelunitroottests

Table2reportstheresultsofthefirst-generationunitroottestsappliedtothesavingsand

investmentseriesinlevels.Thetabledepictstheoutcomesfortheworldpanelof116countriesas

wellasthesubsamplesmentionedintheprevioussection.Thefirstfivetestscheckthenull

hypothesisofnon-stationarityagainstthealternativeoneofstationarity.Thelaststatisticchecksthe

nullhypothesisofnounitrootagainstthealternativeoneofthepresentunitroot.Theoverallresult

ofthesixtestsindicatethatbothseriesarefoundtobenon-stationaryinlevels.However,thesavings

andinvestmentseriesbecomestationaryinfirstdifferences,whichisreportedinTable3.The

obtainedresultsverifythattheseriesareintegratedoforderone,I(1),inlevels.However,the

outcomesoffirstgenerationunitroottestsneedtobeconsideredwithcautionduetotheirstrong

assumptionofcross-sectionalindependence,whichcouldresultinbiasedestimates.Therefore,the

second-generationtest,namelytheCross-SectionalAugmentedIPS(CIPS),hasbeenappliedtothe

series.TheresultsarereportedinTable4and5forthesavingsandinvestmentseries,respectively.

Theestimationoutcomesstronglyconfirmthepresenceofaunitrootforbothseriesintwotypesofa

model:withanintercept(‘drift’)andwithaninterceptandtrend(‘trend’)foranumberoflags

varyingfromtwotofour.Basedontheresultsofbothfirst-generationandsecond-generationtests,it

canbeconcludedthatbothsavingsandinvestmentseriescontainaunitrootintheirlevels.

Therefore,atestforpanelcointegrationbetweentheseriescanbeimplemented.

4.2. Panelcointegrationtest

Table6depictstheresultsofthePedroni’s(1999)cointegrationtestsbetweenthetwoseries.The

tablecomprisesfourstatisticswhichareestimatedwithindimensionandthreestatisticswhichare

estimatedbetweendimension.Thewithin-dimensionstatisticsarecalculatedbypoolingthe

autoregressivecoefficientsacrosscountriesontheobtainedresiduals.Thebetween-dimension

statisticsareestimatedbytakingtheaverageofeachcountry’sindividuallycomputedcoefficients.All

thesevenstatisticscheckthenullhypothesisofnocointegrationagainstthealternativehypothesisof

cointegration.Theobtainedestimatesindicatethatthenullhypothesisofnocointegrationhasbeen

rejectedforeachsub-groupbyatleastthreeofthestatistics.Therefore,itcanbeconcludedthat

thereexistsacointegratingrelationshipbetweenthesavingsandinvestmentseriesineach

22

subsample.Havingobtainedtheresultsinfavourofacointegratingrelationshipbetweenthetwo

series,thepanelcointegrationestimator,namelythePooledMeanGroup(PMG)estimator,canbe

employedinordertoestimatethesaving-investmentcoefficients.

23

Table2.First-generationpanelunitroottests’resultsinlevels.

SampleLLC Breitung IPS ADF PP Hadri

S/Y I/Y S/Y I/Y S/Y I/Y S/Y I/Y S/Y I/Y S/Y I/YWorldpanel 27.60 33.88 0.34 -1.32 -3.39* -2.57* 257.92 241.14 526.11* 444.1* 20.59* 19.61*Developedeconomies 12.63 10.23 0.35 -1.98** -1.75** -1.47*** 57.87 51.95 72.34** 81.07** 8.97* 5.13*Developingeconomies 31.15 21.44 0.91 -1.13 -1.77** 3.24* 143.85 174.32 410.8* 337.7* 13.19* 11.5*OECDcountries 10.84 11.84 0.19 -1.76** 2.76* -2.12** 79.15** 67.74 85.33** 91.63* 5.99* 4.85*Non-OECDcountries 12.21 14.61 0.91 -1.11 -2.57* -2.6* 197.53*** 174.94 441.31* 348.4* 11.69* 12.49*EuropeanUnion(EU) 7.32 12.05 1.13 -2.03** -0.41 -1.45* 33.99 42.63 54.69* 68.45* 6.19* 4.15*EuropeanEconomicArea(EEA)+Switzerland 11.02 11.01 1.08 -2.11** -0.67 -1.30*** 41.46 45.19 66.09 72.99** 6.19* 4.64*

Pre-Maastrichtperiod -0.75 -1.92** -2.22** -1.32*** -0.35 -0.52 26.28 30.52 33.01 22.03 4.07* 3.45*Post-Maastrichtperiod -0.51 7.87 -1.69** -1.27 -1.03 0.29 32.01 14.28 25.96 26.47 3.82* 4.64*NorthAmericanFreeTradeAgreement(NAFTA) 0.98 1.36 -1.82** -1.96** -0.34 -1.43*** 5.11 10.62 5.60 11.26*** 2.61* 3.26*

GroupofSeven(G7) -0.69 2.41 -172** -2.01** -1.57* -0.81 19.84 12.57 16.29 19.39 2.02*** 2.54*AsiaandthePacific 2.61 7.79 0.92 0.21 -1.27 -2.14** 62.14 66.68 79.63 102.9* 6.91* 5.56*AssociationofSoutheastAsianNations(ASEAN) 0.19 -0.23* -1.41*** 0.86*** 0.06 0.55*** 13.57 10.7*** 12.86 10.7*** 3.38* 5.79*

LatinAmericaandtheCaribbean 6.31 12.25 -1.46*** -1.41*** -2.01** -1.79** 59.42 53.97 117.9* 103.7 6.51* 6.24*

LatinAmericanFreeTradeAssociation(LAFTA) 4.80 7.79 -0.74 -1.83** -0.89 -1.97** 24.92 29.89 49.12* 40.32* 4.00* 2.33*

AndeanCommunity 1.85 2.63 0.28 -1.11 0.13 -1.01 10.89 10.61 15.89 17.36*** 3.5* 2.38*MERCOSUR 1.66 3.31 1.69 -0.31 1.35 -1.69** 4.41 13.19 23.89* 17.69** 1.90** 1.14Africa 0.49 10.79 -1.27 -0.79 -3.98* -1.48*** 123.3* 74.4 255.4* 159.9* 6.81* 9.75*Pre-2008crisis 19.93 13.61 3.41 1.34 -1.28* -2.28** 199.1 242.9 414.9* 340.7* 15.77* 15.10*Post-2008crisis -0.41 -17.5* 8.14 6.99 1.47 -2.07** 202.8 236.9 582.5* 629.8* 40.67* 43.22**-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Eachtests’modelcomprisesanindividualinterceptandtrend.ThenumberoflagsforlevelsavingandcapitalformationhasbeendeterminedautomaticallyonthebasisoftheSchwartzinformationcriterion(SIC).

24

Table3.First-generationpanelunitroottests’resultsinfirst-differences.

SampleLLC Breitung IPS ADF PP Hadri

∆S/Y ∆I/Y ∆S/Y ∆I/Y ∆S/Y ∆I/Y ∆S/Y ∆I/Y ∆S/Y ∆I/Y ∆S/Y ∆I/YWorldpanel -30.23* -27.96* 26.82* -22.48* -52.04* -48.51* 2688.3* 2376.1* 3645.2* 2888.5* 1.18 -0.9915Developedeconomies -19.17* -19.51* -13.68* -14.28* -21.84* -20.3* 455.6* 422.1* 936.8* 488.8.* 0.47 3.789*Developingeconomies -33.48* -32.81* 20.81* -16.81* -44.4* -42.22* 1993.5* 1781.9* 3632.4* 2454.1* 4.34* 15.73*OECDcountries -21.54* -21.35* -14.12* -15.38* -23.1* -22.03* 516.04* 488.5* 1255.1* 544.7* 0.78 -0.45Non-OECDcountries -46.01* -41.29* -22.85* -17.74* -46.81* -43.33* 2172.3* 1887.4* 7128.9* 5020.5* 3.03* 1.15EuropeanUnion(EU) -16.39* -16.86* -11.59* -11.89* -19.21* -18.25* 353.4* 340.15* 812.8* 375.5* 0.81 0.02EuropeanEconomicArea(EEA)+Switzerland -12.79* -11.46* -12.81* -13.45* -20.76* -19.6* 408.9* 389.2* 474.02* 407.8* 1.08 1.31

Pre-Maastrichtperiod -6.53* -5.09* 0.04 1.22 -4.07* -1.49*** 59.01* 40.36** 121.9* 62.47* 12.83* 4.74*Post-Maastrichtperiod -7.58* -4.27* -4.89* -7.62* -10.47* -8.36* 130.6* 106.01* 137.04* 113.5* 15.55* 0.85NorthAmericanFreeTradeAgreement(NAFTA) -9.59* -9.39* -6.56* -6.15* -8.79* -8.01* 68.84* 55.24* 66.68* 56.09* 0.10 1.01

GroupofSeven(G7) -10.98* -9.02* -6.87* -7.99* -10.002* -9.64* 102.7* 99.96* 111.2* 108.6* 0.48 0.13AsiaandthePacific -9.11* -12.1* -16.1* -11.24* -23.42* -24.65* 581.7* 701.5* 645.5* 662.2* 1.46*** -0.85AssociationofSoutheastAsianNations(ASEAN) -10.51* -8.67* -8.23* -6.42* -9.07* -8.28* 92.07* 84.4* 113.5* 108.8* -0.19 0.47

LatinAmericaandtheCaribbean -25.21* -23.49* -12.27* -17.78* -26.21* -22.91* 602.35* 469.7* 2381.48* 1403.4* -0.59 0.18

LatinAmericanFreeTradeAssociation(LAFTA) -18.17* -15.81* -7.87 -13.59* -18.65* -15.2* 278.6* 208.4* 771.9* 241.4* 0.64 -0.41

AndeanCommunity -7.01* -6.40* -7.83* -9.63* -12.02* -11.54* 115.9* 106.3* 118.4* 106.9* 1.15 -1.02MERCOSUR -12.00* -9.64* -3.82* -6.46* -12.19* -8.36* 114.8* 72.1* 370.8* 102.3* -0.79 -0.33Africa -32.8* -25.92* -13.69* -8.72* -32.31* -29.02* 1069.2* 800.6* 3259.3* 2659.8* -1.31 -1.67Pre-2008crisis -37.99* -33.52* -21.43* -22.89* -41.99* -37.67* 1804.1* 1596.5* 5401.9* 3253.7* 0.11 -0.35Post-2008crisis -26.26* -39.62* 2.35 -4.99* -5.32* -7.57* 527.7* 647.3* 918.4* 1026.4* 19.83* 10.15**-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Eachtests’modelcomprisesanindividualinterceptandtrend.ThenumberoflagsforlevelsavingandcapitalformationhasbeendeterminedautomaticallyonthebasisoftheSchwartzinformationcriterion(SIC).

25

Table4.CIPStestresultsforgrosssavings.

Samplenone drift trend

1 2 3 4 1 2 3 4 1 2 3 4Worldpanel -2.12* -1.82* -1.81* -1.71* -2.57* -2.26* -2.33* -2.26* -2.80 -2.47 -2.55*** -2.49Developedeconomies -1.84* -1.75** -1.70** -1.44 -1.64 -1.57 -1.46 -1.23 -2.15 -1.98 -2.12 -1.97Developingeconomies -2.13* -1.82* -1.84* -1.81* -2.55* -2.19* -2.26* -2.27* -2.87* -2.53*** -2.55*** -2.53***OECDcountries -2.06* -2.13* -2.05* -1.88* -2.01 -2.06 -1.92 -1.79 -2.33 -2.32 -2.35 -2.26Non-OECDcountries -2.16* -1.79* -1.78* -1.71* -2.61* -2.22* -2.20* -2.17** -2.95* -2.56*** -2.53*** -2.52EuropeanUnion(EU) -1.66** -1.73** -1.75** -1.58*** -1.44 -1.62 -1.54 -1.41 -1.92 -1.84 -1.91 -1.72EuropeanEconomicArea(EEA)+Switzerland -1.71** -1.74** -1.77** -1.54*** -1.50 -1.62 -1.51 -1.36 -1.93 -1.82 -1.89 -1.69

Pre-Maastrichtperiod -1.08 -0.94 -2.54* -2.53* -1.41 -1.28 -1.24 -1.19 -2.44 -2.86 -2.79 -2.56Post-Maastrichtperiod -1.08 -0.94 -2.54* -2.53* -1.40 -1.28 -1.24 -1.19 -2.45 -2.86 -2.78 -2.54NorthAmericanFreeTradeAgreement(NAFTA) -1.65** -1.72** -1.74** -1.59*** -1.55 -1.72 -1.64 -1.51 -1.89 -1.81 -1.88 -1.69

GroupofSeven(G7) -2.10* -1.73* -1.74* -1.65* -1.61 -1.52 -1.52 -1.47 -2.35 -2.26 -2.23 -2.22AsiaandthePacific -1.68** -1.43 -1.46 -1.44 -2.41* -2.15*** -2.24** -2.31** -2.63*** -2.33 -2.42 -2.49AssociationofSoutheastAsianNations(ASEAN) -1.69** -1.61** -1.39 -1.34 -2.24** -2.34** -2.14*** -2.04 -2.34 -2.37 -2.23 -2.09

LatinAmericaandtheCaribbean -2.11* -1.92* -1.77** -1.79* -2.31** -2.07 -2.08 -2.06 -2.46 -2.20 -2.18 -1.89

LatinAmericanFreeTradeAssociation(LAFTA) -2.35* -2.26* -1.87** -1.80** -2.72* -2.74* -2.55** -2.71* -2.99** -2.88** -2.72 -2.78***

AndeanCommunity -2.21* 21.02* -1.87** -1.89* -2.41** -2.17 -2.18 -2.16 -2.56 -2.30 -2.28 -1.99MERCOSUR -2.25* -2.16* -1.77** -1.70** -2.62* -2.64* -2.45** -2.61* -2.89** -2.78** -2.82 -2.88***Africa -2.32* -1.91* -1.89* -1.83* -2.55* -2.12*** -2.05 -2.01 -3.20* -2.86* -2.78** -2.84*Pre-2008crisis -1.90* -1.64* -1.57** -1.51*** -2.22* -1.93 -1.81 -1.77 -2.51*** -2.12 -2.05 -2.00Post-2008crisis -1.80* -1.54* -1.47** -1.41*** -2.32* -2.03 -1.91 -1.87 -2.41*** -2.02 -1.95 -1.90*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Nonestandsforamodelwithoutadriftandtrend;driftstandsforamodelwithanindividualintercept;trendstandsforamodelwithanindividualinterceptandtrend.1,2,3,and4standforanumberoflaggedvaluesincludedintotheestimatingequation.

26

Table5.CIPStestresultsforgrossinvestment.

Samplenone drift trend

1 2 3 4 1 2 3 4 1 2 3 4Worldpanel -2.19* -1.94* -1.77* -1.65* -2.34* -2.10** -1.98 -1.86 -2.87* -2.68* -2.57** -2.37Developedeconomies -1.92* -1.74** -1.62** -1.55*** -2.19** -1.86 -1.63 -1.62 -2.52 -2.11 -1.95 -1.98Developingeconomies -2.29* -2.01* -1.84* -1.59** -2.51* -2.27* -2.16** -1.89 -2.98* -2.86* -2.73* -2.40OECDcountries -1.92* -1.79* -1.75* -1.75* -2.17** -1.96 -1.87 -1.91 -2.44 -2.10 -2.07 -2.07Non-OECDcountries -2.27* -1.98* -1.77* -1.54** -2.47* -2.24* -2.09** -1.86 -2.96* -2.86* -2.70* -2.38EuropeanUnion(EU) -2.00* -1.78** -1.59*** -1.56*** -2.39* -2.06 -1.78 -1.76 -2.54 -2.19 -2.01 -2.04EuropeanEconomicArea(EEA)+Switzerland -2.08* -1.88* -1.67** -1.63** -2.36* -2.08 -1.80 -1.79 -2.49 -2.14 -1.96 -1.98

Pre-Maastrichtperiod -2.18* -1.55 -1.31 1.22 -2.25 -1.08 -1.01 -1.01 -3.29** -2.83 -2.74 -2.52Post-Maastrichtperiod -1.30 -1.27 -0.89 -0.87 -1.78 -1.63 -1.21 -1.15 -2.69 -2.68 -2.34 -2.07NorthAmericanFreeTradeAgreement(NAFTA) -2.33* -1.89** -1.71*** -1.61*** -2.12* -2.05 -1.78 -1.76 -2.68 -2.34 -2.22 -2.04

GroupofSeven(G7) -2.65* -2.38* -1.77*** -1.54*** -2.25 -2.08 -2.01 -1.86 -2.54 -2.18 -2.09 -2.02AsiaandthePacific -1.92* -1.77* -1.66** -1.54*** -2.04 -1.91 -1.79 -1.66 -2.70** -2.74** -2.68** -2.61***AssociationofSoutheastAsianNations(ASEAN) -2.27* -2.11* -2.06* -1.97** -2.61* -2.49** -2.52** -2.44** -2.68 -2.53 -2.58 -2.32

LatinAmericaandtheCaribbean -2.53* -2.15* -1.87* -1.72** -2.75* -2.34** -2.10* -1.91 -2.81** -2.31 -2.05 -1.83

LatinAmericanFreeTradeAssociation(LAFTA) -2.11* -2.09* -2.07* -1.78*** -2.47** -2.47** -2.54** -2.25*** -2.72 -2.56 -2.62 -2.47

AndeanCommunity -2.43* -2.05* -1.77* -1.62** -2.65* -2.24** -2.00* -1.81 -2.71** -2.21 -2.05 -1.78MERCOSUR -2.21* -2.19* -2.17* -1.88*** -2.27** -2.67** -2.74** -2.45*** -2.62 -2.46 -2.32 -2.27Africa -2.15* 1.83* -1.78* -1.60** -2.37* -2.03 -2.14** -1.88 -2.88* -2.72** -2.92* -2.49Pre-2008crisis -2.11* -1.89* -1.71* -1.55** -2.18* -1.91 -1.76 -1.54 -2.52*** -2.35 -2.21 -1.95Post-2008crisis -2.01* -1.79* -1.61* -1.45** -2.28* -2.01 -1.86 -1.64 -2.42*** -2.25 -2.11 -1.85*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Nonestandsforamodelwithoutadriftandtrend;driftstandsforamodelwithanindividualintercept;trendstandsforamodelwithanindividualinterceptandtrend.1,2,3,and4standforanumberoflaggedvaluesincludedintotheestimatingequation.

27

Table6.ResultsofthePedronicointegrationtests.

SampleWithin-dimension Between-dimensionν-Statistic σ-Statistic ρρ-Statistic ADF-Statistic ρρ-Statistic σ-Statistic ADF-Statistic

Worldpanel 3.26* -9.54* -12.4* -11.53* -5.46* -11.34* -10.75*Developedeconomies 0.35 -1.70 -2.77* -3.08* 0.23 -1.71** -2.78*Developingeconomies 3.24* -9.98* -12.44* -10.92* -6.31* -12* -11.35*OECDcountries 0.13 -1.75 -2.94* -3.05* 0.31 -1.81** -2.97*Non-OECDcountries 3.36* -9.70* -12.14* -11.23* -5.9* -11.45* -12.05*EuropeanUnion(EU) 0.24 -1.38 -2.47* -2.70* 0.40 -1.53** -3.47*EuropeanEconomicArea(EEA)+Switzerland 0.38 -1.43 -2.48* -2.82* 0.53 -1.40** -3.45*

Pre-Maastrichtperiod 2.16* 0.82 -0.16 0.24 1.41 -2.63* -3.75*Post-Maastrichtperiod 2.23* 0.89 -0.23 0.31 1.48 -2.70* -3.82*NorthAmericanFreeTradeAgreement(NAFTA) 0.34 -1.48 -2.57* -2.70* 0.55 -1.63** -3.67*

GroupofSeven(G7) 0.51 -1.65 -2.74* -2.87* 0.72 -1.80** -3.84*AsiaandthePacific 2.34* -4.24* -5.56* -5.02* -2.59** -5.36* -5.16*AssociationofSoutheastAsianNations(ASEAN) -0.08 -0.45 -1.54*** -1.72** 0.35 -1.79** 0.01**

LatinAmericaandtheCaribbean 2.04* -6.71* -8.13* -5.99* -4.19* -7.49* -5.81*

LatinAmericanFreeTradeAssociation(LAFTA) 2.23* -4.96* -5.89* -6.26* -3.14* -5.7* -6.19*

AndeanCommunity 2.12* -3.81* -4.36* -4.55* -2.53** -4.13* -4.23*MERCOSUR 1.18** -4.15* -4.66* -5.43* -2.72** -4.23* -5.15*Africa 1.51** -6.59* -8.26* -7.68* -4.17* -8.03* -8.93*Pre-2008crisis 0.87 -6.59* -11.32* -8.99* -2.11** -9.91* -8.19*Post-2008crisis -2.06* 2.55** -8.16* -5.97* 6.46* -8.92* -5.16**-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.ThenumberoflagshasbeendeterminedautomaticallyonthebasisoftheSchwartzinformationcriterion(SIC).

28

4.3. PanelestimationresultsbasedonApproachII

Thefollowingsectionfocusesonthepanelestimationresultsbasedonthesecondapproachwhich

includesfixingofthelong-runcoefficientatthevalueofonesothattheintertemporalbudget

constraintismet.Thissectionisdividedintosub-sectionsaccordingtotheeconomicdevelopmentof

thecountriesinthesubsamples,theirgeographicallocation,theirlevelofeconomicandpolitical

integration,andhistoricalperiods.Beforeundertakingpanelestimation,boththeinvestmentand

savingsserieshavebeentestedforthecross-sectionaldependenceusingthetestdevelopedby

Pesaran(2015).Underthenullhypothesis,thevariableisweaklycross-sectionaldependentwhereas

underthealternativehypothesis,thevariableisstronglycross-sectionaldependent.Theestimated

CD-statisticsaresummarizedinTable7.Theresultsindicatethatinallthesubsamples,thenull

hypothesisofweakcross-sectionaldependencecanberejectedforbothseries.Thus,theCCEMG

estimatorshouldbeappliedtothedatatoobtainconsistentestimates.

Table7.Testforcross-dependenceamongcountries.

SubsampleI/Y S/Y

CD-statistic p-value CD-statistic p-value

Worldpanel 445.051 (0.000) 414.707 (0.000)Developedeconomies 105.458 (0.000) 103.539 (0.000)Developingeconomies 301.435 (0.000) 278.092 (0.000)OECDcountries 118.086 (0.000) 117.138 (0.000)

Non-OECDcountries 325.638 (0.000) 296.516 (0.000)

EuropeanUnion(EU) 81.609 (0.000) 80.347 (0.000)EuropeanEconomicArea(EEA)+Switzerland 93.545 (0.000) 92.055 (0.000)Pre-Maastrichtperiod 24.241 (0.000) 24.260 (0.000)Post-Maastrichtperiod 34.912 (0.000) 34.710 (0.000)NorthAmericanFreeTradeAgreement(NAFTA) 9.863 (0.000) 9.885 (0.000)GroupofSeven(G7) 26.122 (0.000) 26.117 (0.000)AsiaandthePacific 107.113 (0.000) 102.902 (0.000)AssociationofSoutheastAsianNations(ASEAN) 23.366 (0.000) 23.500 (0.000)LatinAmericaandtheCaribbean 96.748 (0.000) 89.385 (0.000)LatinAmericanFreeTradeAssociation(LAFTA) 41.579 (0.000) 40.672 (0.000)AndeanCommunity 17.657 (0.000) 17.070 (0.000)MERCOSUR 13.623 (0.000) 13.420 (0.000)Africa 134.874 (0.000) 118.438 (0.000)Pre-2008crisis 373.738 (0.000) 365.844 (0.000)Post-2008crisis 212.209 (0.000) 198.574 (0.000)p-valuesarereportedinparentheses.

29

4.3.1. Worldpanel

Thefirstsub-sectionisdevotedtotheoverallpanelof116countries.Thepanelestimationresultsare

reportedinTable8.Theadjustmentcoefficientfortheworldsampletakesthevalueof-0.274which

indicatesthatinthelongrun,capitalmobilityacrosscountriesworldwideisrelativelyhigh.Sucha

resultcontradictsthepuzzlingresultoflowcapitalmobilityobtainedbyFeldsteinandHorioka

(1980).Theestimatedcoefficientprovesthattheongoingfinancialliberalizationhasreducedthe

magnitudeofcapitalcontrols,andconsequently,hasincreasedcapitalmobility.Suchalow

convergenceparameterindicatesthatthenumberofconstraintshasdecreasedonthedomesticand

internationalfinancialmarketsthatusedtopreventcountriesfromborrowingfromtheplaceswith

betterratesofreturn.Moreover,theshort-runcoefficientof0.256indicatesthatintheshortrun,

countriesarelessreliantondomesticsavingsandchooseinternationalsavingsasasourceoffinance

fordomesticinvestmentinordertoovercomeshort-runfluctuationsintheeconomy.

Table8.Panelestimationresultsfortheworldsample.

Coefficient Std.error

Adjustmentcoefficient

-0.2738713(-15.61)* 0.017545

∆S/Y 0.2562851(9.55)* 0.0268265

CD-statistic 1.28p-value (0.2018)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

4.3.2. Samplingbasedonthethelevelofeconomicdevelopment

Thenextsub-sectionanalysescountriesinthesamplesbasedonthelevelofeconomicdevelopment.

Suchsamplescomprisedevelopedanddevelopingeconomies,OECDandnon-OECDcountries,andG7

asaseparategroupofthesevenwealthiestcountriesintheworld.Table9reportstheobtained

estimates.Theadjustmentandshort-runcoefficientsforbothdeveloped/developingeconomiesand

OECD/non-OECDcountriesconfirmtheresultsofSinhaandSinha(2004),Bahmani-Oskooeeand

Chakrabarti(2005),andChakrabarti(2006)whohavefoundthatcapitalmobilitytendstobehigher

indevelopingornon-OECDcountriesratherthandevelopedorOECDcounties.Suchasurprising

resultisexplainedbythefactthatdevelopedeconomiesareabletofinancedomesticinvestment

30

Table9. Robustnessoftheestimatestothelevelofeconomicdevelopment.


Developedeconomies


-0.2143853(-5.04)* 0.0425624

∆S/Y 0.2890824(5.25)* 0.0550734

CD-statistic -1.09p-value (0.2778)

Developingeconomies


-0.0760615(-3.34)* 0.0227543

∆S/Y 0.1438495(4.09)* 0.0351346


OECDcountries


-0.1890626(-6.69)* 0.0282549

∆S/Y 0.2018538(4.21)* 0.0479634


Non-OECDcountries


-0.0443395(-2.21)** 0.0200388

∆S/Y 0.138981(4.20)* 0.0330668


GroupofSeven(G7)


-0.0590037(-2.20)**

-0.0013059(0.11)

∆S/Y 0.5515797(10.96)*

0.5715705(11.60)*

CD-statistic -1.62p-value (0.1044)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

fromtheirlargepoolsofdomesticsavingswithoutaneedtorelyoninternationalcapitalmarkets

whereasdevelopingeconomiesaremorereliantoninternationalborrowingduetoaninsufficient

amountofdomesticsavings.Asforthegroupofthesevenwealthiestcountries,theobtained

estimatesdiffersignificantlyfromthoseofdevelopedand/orOECDcountries.Theadjustment

31

coefficientshowsthatG7countriesobservehighcapitalmobilityinthelongrunwhichislargerthan

inthegroupofdevelopedeconomiesandOECDcountries.G7countriesarecharacterizedbystrong

financialmarkets,highdegreeoffinancialliberalization,andheavyrelianceoninternationalcapital

marketsinthelongrunwhichallresultintoincreasedcapitalmobilityacrossG7countries.However,

intheshortrun,thesevenwealthiestcountriesarelessdependentoninternationalborrowingsince

theypossessalargeamountofdomesticsavingswhichisenoughtofinancedomesticinvestment

duringshort-termfluctuationsintheeconomy.

4.3.3. Samplingbasedonthegeographicallocation

Thefollowingsub-sectiondealswiththesamplesofcountriesbasedontheirgeographicallocation,

whichconsistofAsiaandPacific,LatinAmericaandtheCaribbean,andAfrica.Theexplanationfor

thechoiceofsuchsubsamplesisquiteintuitive.Itisinterestingtoseewhetherthecountriesinthe

subsamplesobservehigherdegreeoffinancialintegrationduetotheirrelativelyclosegeographical

location,similarculturalandhistoricalbackground,lowerlanguagebarriers,similarpoliticaland

economicsystems.Table10reportstheobtainedresults.Theestimatedconvergenceparametersand

short-runcoefficientsindicatethatcapitalmobilityisrelativelyhighamongcountriesineach

subsample.Thehighestcapitalmobilitybothintheshortrunandinthelongrunisobservedby

AsianandPacificcountries,thelowestcapitalmobilityisexperiencedbyAfricancountrieswhereas

LatinAmericanandCaribbeancountriesarebeingin-between.Suchresultshaveaplausible

explanation.AsianandPacificcountriesareexpectedtoobservethehighestcapitalmobilitysince

mostofthemarecharacterizedbystrongeconomicgrowthandliberalizedfinancialmarketswherea

highvolumeoffinancialtransactionsandcapitalmovementsareundertakenwhereasmostofthe

Africancountriesarecharacterizedbyunstableeconomicandpoliticalsystemswhichconstrainthe

countriesintermsoffinancialtransactions.Nevertheless,theobtainedestimatesstillshowthat

capitalmobilityacrossAfricancountriesisrelativelyhigh,whichindicatesthattheongoingprocess

ofestablishingtheAfricanUnionhashaditspositiveeffectsonthecreationofonestrongfinancial

marketonthecontinent.TheestimatesforLatinAmericaandtheCaribbeanindicatethat,similarto

thecaseofAfrica,despitethefactthatLatinAmericaandCaribbeancountriesfaceanumberof

economicandpoliticalissues,theongoingfinancialliberalizationhasresultedintolowercapital

constraintsandhighercapitalmovementsacrossthecountries.Thus,itcanbeconcludedthathigh

estimatesofcapitalmobilityforthethreesubsamplescouldbetheresultofincreasedfinancial

integrationacrosscountrieswhichisenhancedbytheirclosegeographicallocationandsimilarsocial

backgrounds.

32

Table10. Panelestimationresultsfordifferentgeographicalregions.


AsiaandthePacific


-0.2330471(-6.86)* 0.0339509

∆S/Y 0.1571965(2.16)** 0.0727699


LatinAmericaandtheCaribbean


-0.2730756(-6.43)* 0.0424476

∆S/Y 0.2199877(4.97)* 0.0563231

CD-statistic -2.20p-value (0.0575)***

Africa


-0.3069722(-9.90)* 0.0309947

∆S/Y 0.2180294(8.12)* 0.0366995


4.3.4. Samplingbasedonthedegreeofeconomicintegration

Thissectionprovidesacomparisonoffivefreetradeareas(EEA,NAFTA,ASEAN,LAFTA,andAndean

Community),onecustomsunion(Mercosur),andoneeconomicunion(EU)intermsofcapital

mobility.TheresultsaresummarizedinTable11and12.BasedontheresultsfromTable11,itcan

beconcludedthatNAFTAoutperformstherestofthefreetradeareasintermsofcapitalmobilityin

thelongrun.HighfinancialintegrationacrossthemembersofNAFTAcouldbeduetothefactthat

thetradeareaconsistsonlyofthreecountries,whichmakesiteasiertoundertakeregulationsand

implementpoliciesorientedatfinancialliberalizationofcapitalflows.Asonecouldexpect,a

relativelyhighestimateofcapitalmobilityinthelongrunhasalsobeenobtainedforEEA,whoseone

ofthemainfourfreedomsisfreemovementofcapitalwhichreducesanyrestrictionsoncapital

33

Table11. Panelestimationresultsforthefreetradeareas.


EuropeanEconomicArea(EEA)+Switzerland


-0.2260521(-4.70)* 0.0480678

∆S/Y 0.2560777(3.93)* 0.0652254


NorthAmericanFreeTradeAgreement(NAFTA)


-0.1363289(-2.05)** 0.0665462

∆S/Y 0.2564985(2.74)* 0.0936346


AssociationofSoutheastAsianNations(ASEAN)


-0.4497442(-3.71)* 0.1212394

∆S/Y 0.296663(1.97)**

0.1509153


LatinAmericanFreeTradeAssociation(LAFTA)


-0.3666112(-6.26)* 0.0585242

∆S/Y 0.289974(3.01)* 0.0963524


TheAndeanCommunity


-0.4126867(-3.57)* 0.1154712

∆S/Y 0.2936067(2.18)** 0.1348044

CD-statistic -1.05p-value (0.2949)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.movements.AsforASEAN,LAFTA,andtheAndeanCommunity,despitethefactthatthetradeareas

havebeenestablishedwiththeaimofpromotingfreeinvestmentflowsandeconomicintegration,

theobtainedestimatesofconvergenceparametersindicatethatthedegreeofcapitalmobilityamong

34

member-countriesisrelativelymedium.Suchsurprisingoutcomescouldbeexplainedbythefactthat

mostofthemember-countriesofthetradeareasexperienceunstableeconomicgrowthwithalarge

numberofdisturbancesanduncertaintiesontheirdomesticfinancialmarketswhichpreventthem

fromestablishingastrongcommonfinancialmarketwithinthetradearea.

TheresultsforMercosurandEUarereportedinTable12.DespitethefacttheEuropeanUnionis

consideredtobeoneofthemosteconomicallyintegratedunionintheworld,theestimatesofboth

adjustmentandshort-runparametersindicatethatMercosuroutperformstheEuropeanUnionin

termsofcapitalflowsbothintheshortrunandinthelongrun.However,suchoutcomesshouldn’t

comeasasurprise.ThesamplefortheEuropeanUnionconsistsof21countrieswhichdiffer

substantiallyfromeachotherintermsofeconomicdevelopmentandsocialbackgrounds.Onthe

otherhand,Mercosurconsistsoffourmembers(Argentina,Brazil,Paraguay,andUruguay)whichare

relativelysimilarintheirsocialandeconomicbackgrounds,makingitlesstedioustomovecapital

acrosseachother’sborders.Moreover,theEuropeanUnionsincludesasignificantnumberof

developedcountrieswhich,asdiscussedabove,tendtofinancedomesticinvestmentfromtheirlarge

Table12. PanelestimationresultsforMercosurandEU.


Mercosur


-0.0951646(-4.25)* 0.0223772

∆S/Y 0.0718631(0.41) 0.1741731

CD-statistic 1.28p-value (0.2018)

EuropeanUnion(EU)


-0.2756681(-4.21)* 0.0655308

∆S/Y 0.296114(4.56)* 0.0649377

CD-statistic -1.05p-value (0.2937)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.poolsofdomesticsavingswithnoneedtorelyonforeigncapitalmarkets.Therefore,basedonthe

resultsobtainedforthissub-section,itcanbeconcludedthatthedegreeoffinancialintegrationof

thetradearea,customsunion,oreconomicuniondependsnotonlyonthecommonregulationsand

35

policyframeworksbutalsoonindividualeconomic,political,andsocialcharacteristicsoftheir

members.

4.3.5. Panelestimationinthepre-andpost-Maastrichtperiods

ThefollowingsubsectiondiscussestheeffectsoftheMaastrichtTreatyoncapitalmobilityacross

countrieswhosignedtheTreatyin1992.Table13summarisestheobtainedestimates.Theresults

forboththeconvergenceparametersandtheshort-runsaving-retentioncoefficientsindicatethatthe

introductionoftheMaastrichtTreatyhashadasignificantlypositiveeffectoncapitalmobilityacross

12Europeancountries.Theestimatedcoefficientsareinlinewiththeresultsofotherscholars(e.g.

Kumaretal.,2010,andKumarandRao,2011,etc.)whohavealsofoundasignificantincreasein

capitalmobilityaftertheintroductionoftheTreaty.Thus,itcanbeconcludedthatthe

implementationoftheMaastrichtagreement,whichhastriggeredanumberofliberalisationreforms

andpolicies,hassignigificantlyraisedthevolumeofcapitalflowsacross12Europeaneconomies.

Table13. Panelestimationresultsinthepre-andpost-Maastrichtperiods.


Pre-Maastrichtperiod


-0.515811(-3.16)*

0.4158472

∆S/Y 0.5728278(1.98)** 0.289747


Post-Maastrichtperiod


-0.2482561(-4.31)*

0.1039787

∆S/Y 0.3214063(3.21)

0.1000404


4.3.6. Panelestimationinthepre-andpost-2008crisisperiods

Thelastsub-sectionfocusesonthefinancialcrisisof2008anditseffectsonthedegreeofcapital

mobilityworldwide.TheestimatedresultsarereportedinTable14.Theestimatesofboththe

convergencecoefficientsandtheshort-runsaving-retentionparametersconfirmtheprevious

36

findingsofButandMorley(2016)thattherehasbeenadropintheinternationalcapitalmobilitydue

tothecrisisof2008.Theobtainedoutcomesconfirmthatthefinancialcrisishasdecreasedinvestors’

toleranceforriskandcreatedtheoveralluncertaintyontheinternationalfinancialmarket,whichhas

resultedintolessfinancialtransactionsworldwide.

Table14. Panelestimationresultsinthepre-andpost-2008crisisperiods.


Pre-2008crisis


-0.2095547(-14.36)* 0.0215564

∆S/Y 0.2264512(8.39)* 0.0317425

Hausman’stest -0.94p-value (0.3450)*

Post-2008crisis


-0.4110384(-12.24)*

0.0314764

∆S/Y 0.2859795(11.81)* 0.0224445

CD-statistic -0.68p-value (0.4944)**-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

4.4. PanelestimationresultsbasedonApproachI

SinceapproachIisoflessimportanceinthisresearch,thissectionprovidesaquickdiscussionand

comparisonoftheestimatedresultswiththeoutcomesfromtheprevioussection.Table15reports

theobtainedestimatesfromtheconventionalerrorcorrectionframework.Thetablecomprisesthe

estimatesoftheshort-run,long-run,andadjustmentcoefficients,theresultsoftheWaldtestforthe

significanceofthelong-runcoefficienttogetherwiththeresultsoftheCDstatisticforcheckingthe

extentofcross-sectionaldependence.

4.4.1. Convergenceparameters

Alloftheobtainedconvergencecoefficientsaresignificantat1%levelandpossesstheexpected

negativesign.Theoutcomesindicatethatthereexistsanadjustmentdynamicofcapitalmobility

fromtheshortruntothelongrunacrosscountriesfromalltheconsideredsamples.Theaverage

convergenceparameteracrossthesubsamplesisestimatedtobe-0.399.Thehighestspeedof

37

adjustment(-0.615)tothelong-runequilibriumisfoundinacrossthemembersoftheMercosur.

Otherhighestcoefficientsof-0.585,-0.554,-0.546,and-0.544areobservedbythemembersof

ASEAN,theLatinAmericanFreeTradeAssociation(LAFTA),inthepost-2008crisisperiodandinthe

AndeanCommunity,respectively.Theworldpanelof116countriesobservetheconvergence

parameterof-0.404whichissimilartotheaveragecoefficientof-0.399acrossthesubsamples.The

lowestadjustmentcoefficientsof-0.210,and-0.212havebeenfoundinthepost-Maastrichtperiod

andacrossthemembersofNorthAmericanFreeTradeAgreement(NAFTA),respectively.The

estimatedadjustmentcoefficientsarenotsignificantlydifferentfromthecoefficientsobtainedusing

approachII.However,thereareafewexceptions.Forinstance,theoutcomesindicatethatwhenthe

solvencyconditionisaccountedfor,thevaluesoftheconvergenceparametersfordeveloping,non-

OECD,Mercosur,andG7countriesdecreasesubstantially,whichshowsthatwithoutfixingthelong-

runcoefficient,theadjustmentcoefficientstendtobeoverestimated,whichleadstothefalse

conclusionoflowerspeedofconvergencetothelong-runequilibrium.

4.4.2. Short-runsaving-retentioncoefficients

Asfortheshort-rundynamics,theyaremainlydrivenbythegapbetweenthecurrentvalueofthe

currentaccountanditslong-termvalue.Thus,theshort-runsavings-retentioncoefficientsreflectthe

short-runadjustmentsofcapitalmobilitytoeconomicshocks.Theshort-runcoefficientsfor

Mercosur,ASEAN,andtheAndeanCommunityhavebeenestimatednottobestatisticallydifferent

fromzero,whichindicatesthatthemembersofthethreeeconomicassociationsobservehighcapital

mobilityintheshort-run.Therestofthecoefficientshasbeenfoundtobestatisticallysignificant

withanaveragevalueof0.259whichisanindicatorofrelativelyhighcapitalmobilityintheshort

run.Theestimatedshort-runcoefficientstendtobeslightlyhigherthanthesaving-retention

coefficientsfromapproachII.Moreover,theshort-runcoefficientforthepost-Maastrichtperiod

becomesstatisticallysignificantintheconventionalerror-correctionmodelwhereasintheprevious

specificationithasbeenestimatedtobestatisticallyinsignificant.Therefore,itcanbeconcludedthat

whentheintertemporalbudgetconstraintisnotcontrolledfor,themodelwilltendtounderestimate

thedegreeofcapitalmobilityintheshortrun.

4.4.3. Long-runsaving-retentioncoefficients

Intheconventionalmodel,thelong-runsaving-retentioncoefficientsareestimatedinsteadofbeing

fixedatthevalueofone.Theestimatesofthelong-runcoefficientsarereportedtogetherwiththe

38

resultsoftheWaldtestwhichcheckswhetherthelong-runcoefficientsarestatisticallydifferentfrom

thevalueofone.Thenullhypothesisofthetestisthelong-runcoefficientbeingequaltoonewhereas

thealternativehypothesisisthelong-runcoefficientbeingdifferentfromone.Underthenull

hypothesis,theWaldtestfollowsanasymptoticchi-squaredistribution.AstheWaldstatistic

indicates,thesaving-retentioncoefficientisnotdifferentfromoneforcountriesinthefollowing

samples:pre-Maastrichtandpost-Maastrichtperiods.Theresultsindicatethatthesavingand

investmentseriesformthecointegratingvectorof(1,-1),whichmeansthatthecurrentaccountisa

stationaryprocess.Therefore,thebudgetconstraintisbindingfortheaforementionedsubsamples

andthereisnoevidenceofcapitalmobilityacrossthemembersofthesubsamplesinthelongrun.

Asfortherestofthesubsamples,theobtainedestimatesindicatethatthesaving-retentioncoefficient

isnotdifferentfromzeroforcountriesinthefollowingsamples:thewholesample,European

EconomicArea(EEA),theNorthAmericanFreeTradeAgreement(NAFTA),G7,theAssociationof

SoutheastAsianNations(ASEAN),theLatinAmericanFreeTradeAssociation(LAFTA),andthe

AndeanCommunity.Theresultsindicatethatthereisnorelationshipbetweenthesavingand

investmentseriesinthelongrun,whichmeansthatthedegreeofcapitalmobilityishighacrossthe

membersoftheaforementionedsubsamples.Thecoefficientsfortherestofthesamplesarefoundto

bedifferentfromzero.Allinall,theobtainedestimatesshowthatthecurrentaccountisanon-

stationaryprocess.Inotherwords,thecurrentaccountcanbenon-stationaryonlyinthepresenceof

capitalmobility;thus,itcanbeconcludedthatinthelongrun,thereissomedegreeofcapital

mobilityacrossthemembersofthesubsamples.Theaveragelong-runcoefficientacrossthe

subsamples,excludingthosewiththecoefficientequaltooneandzero,is0.508whichisanindicator

ofarelativelymediumdegreeofcapitalmobilityinthelong-run.Asithasalreadybeenmentioned

before,suchaninterpretationofthelong-runcoefficientseemstobeconfusing.Sincethe

intertemporalbudgetconstraintshouldbebinding,thelong-runcoefficientsshouldalwaysbeequal

toone.Thepossibleexplanationwhythelong-runsaving-retentioncoefficientsdon’thavethevalue

ofonecouldbethefollowing:sincethelong-runcoefficientrepresentsthesolvencyconditionorthe

currentaccount’slong-runequilibriumvalueofzero,thetimedimensionof37yearscouldbenot

longenoughtocapturethelong-runequilibriumofzerowhichisrequiredbytheintertemporal

budgetconstraint.Thus,approachIIseemstobemoreplausiblesinceitaccountsforthesolvency

conditionevenwhenthesampleisnotlongenoughbyfixingthelong-termsaving-retention

coefficientatthevalueofone.

39

Table15. Panelcointegrationestimation.

SampleAdjustmentcoefficient Long-runcoefficient Short-runcoefficient CD-statistic Waldstatisticcoefficient st.err. coefficient st.err. coefficient st.err. statistic p-value statistic p-value

Worldpanel -0.4038253 0.0152202 -0.0458284* 0.5585001 0.2083798 0.0234191 0.93 (0.3520) 411.87 (0.0000)Developedeconomies -0.3017379 0.0498379 0.5751305 0.2046352 0.2522795 0.0604574 -0.55 (0.5812) 19.29 (0.0000)Developingeconomies -0.4802684 0.0192789 0.3401659 0.1018299 0.1836718 0.0265297 -1.16 (0.2480) 365.83 (0.0000)OECDcountries -0.2480515 0.0219487 0.6162184 0.0647073 0.1654202 0.0528793 -1.27 (0.2035) 35.18 (0.0000)Non-OECDcountries -0.4642315 0.0183882 0.4299072 0.0228051 0.1865695 0.0324313 -0.54 (0.5925) 377.77 (0.0000)EuropeanUnion(EU) -0.3823873 0.0735806 0.6547834 0.0745452 0.2779385 0.0773684 -0.82 (0.4115) 21.45 (0.0000)EuropeanEconomicArea(EEA)+Switzerland

-0.3469904 0.059297 0.1608858* 0.5331988 0.23968 0.082495 -0.82 (0.4102) 26.95 (0.0000)

Pre-Maastrichtperiod -0.2982937 0.086421 1.182997 0.1591193 0.6825464 0.1779755 -1.32 (0.2501) 0.05* (0.8219)Post-Maastrichtperiod -0.2101561 0.0568603 1.062421 0.1547093 0.3575167 0.0763738 -0.16 (0.6866) 1.37* (0.2420)NorthAmericanFreeTradeAgreement(NAFTA)

-0.2115281 0.0380818 -0.2720677* 0.6509579 0.3061996 0.0345024 -0.91 (0.3396) 23.45 (0.0000)

GroupofSeven(G7) -0.214721 0.0598127 -0.2898735* 0.9628688 0.3520751 0.0565659 -0.55 (0.8219) 43.45 (0.0000)AsiaandthePacific -0.3458323 0.0418092 0.5695016 0.1168001 0.1074142 0.0700966 -1.66 (0.0978) 93.82 (0.0000)AssociationofSoutheastAsianNations(ASEAN) -0.5845749 0.1440604 0.0572734* 0.4115418 0.2044229* 0.1364081 -1.37 (0.2420) 66.15 (0.0000)

LatinAmericaandtheCaribbean -0.4993838 0.0367986 0.3859199 0.0717686 0.202206 0.0548217 -1.33 (0.2501) 181.71 (0.0000)

LatinAmericanFreeTradeAssociation(LAFTA)

-0.5539614 0.0654739 0.2276928* 0.1484647 0.1240586 0.0889638 -1.36 (0.1732) 56.73 (0.0000)

AndeanCommunity -0.5438732 0.1102597 0.4240071* 0.2541726 0.2215639* 0.1350364 -1.16 (0.2480) 16.91 (0.0000)MERCOSUR -0.6149971 0.0967405 0.5503785 0.1156409 0.1796691* 0.1180897 -1.37 (0.2420) 12.73 (0.0000)Africa -0.4603094 0.0336512 0.4761417 0.065937 0.2268706 0.0367091 -0.81 (0.3396) 162.88 (0.0000)Pre-2008crisis -0.2884426 0.0192463 0.5122411 0.0233786 0.2382919 0.0268849 -1.44 (0.1501) 501.19 (0.0000)Post-2008crisis -0.5456783 0.0329586 0.4728803 0.0269576 0.2872104 0.0504898 -0.82 (0.4102) 1094.88 (0.0000)*-nullhypothesisofzerocoefficientcannotberejectedat1%,5%,and10%level,respectively.

40

4.5. Robustnesstopopulationgrowthandcountry’ssize

Toseewhethertheresultsarerobusttotheadditionofothervariables,amodifiedmodelhasbeen

estimatedusingbothapproachIandII.FollowingtheworkofPetreskaandMojsoska-Blazevski

(2013),suchvariables,aspopulationgrowthandsizeofthecountry,havebeenintroducedintothe

equationtoobserveiftheyaffectthesizeofthecoefficientsforthewholepanelofcountries.The

results,estimatedusingapproachI,aresummarizedinTable16,andtheresults,estimatedusing

approachII,arereportedinTable17.

Basedontheconventionalapproach,thelong-runcoefficientsforthevariablesofpopulationgrowth

andlog(GDP)entertheregressionwithstatisticallyinsignificantvalues,whichindicatesthatthereis

nolong-runrelationshipbetweentheseriesofinvestment,savingsandtwoadditionalvariables.The

short-runcoefficientforthepopulationgrowthisestimatedtobestatisticallyinsignificant,which

reflectsthefactthatforthewholepanel,populationgrowthhasnoinfluenceoninvestment.Incase

oflog(GDP),asameasureofacountrysize,thecoefficientisstatisticallysignificantandentersthe

equationwiththeexpectedpositivesignasonecouldexpectalargercountrytoobservelarger

amountsofundertakeninvestment.However,theeffectofacountrysizeisrelativelylow:whenGDP

increasesby1%,oneshouldexpectinvestmenttoincreaseonlyby0.057percentagepoints.The

additionofthetwovariabletotheequationhasaffectedtheestimatedparametersinthefollowing

way.Firstly,theadjustmentcoefficienthasdecreasedsignificantlyfromthevalueof-0.404to-0.824.

Second,thelong-runcoefficienthasbecomestatisticallysignificantfrom0andhasbeenestimatedto

be0.318.Thevalueoftheshort-runcoefficienthaschangeddramaticallyandremainsaroundthe

valueof0.202.Basedontheobtainedresults,itcanbeconcludedthatcontrollingforthetwo

variableshasalteredthemagnitudeoftheestimatedcoefficients.Thelargestchangehasbeen

observedbythelong-runcoefficient,whichmeansthatthecountrysizehasaneffectonthe

adjustmentofthesavingsandinvestmenttotheeconomicshocksinthelongrun.Whenthevariables

areaccountedfor,thedegreeofcapitalmobilityturnsouttoberelativelyhighinthelongrun

whereastheeffectislesssignificantforcapitalmobilityintheshortrun.Moreover,theintroduction

ofthecountrysizevariableraisesthespeedofadjustmentofsavingandinvestmenttotheirlong-run

equilibrium.Thus,onecanconcludethatcountrysizecanpotentiallyexplainthepuzzling

relationshipbetweensavingsandinvestmentinthelongrun;however,thecloserelationshipinthe

shortrunstillremainstobeapuzzle.

41

Table16. ApproachI:robustnesstopopulationgrowthandcountry’ssize.

Coefficient StandarderrorAdjustmentcoefficient -0.8239775 0.0324936

Long-runcoefficients S/Y 0.3181433 0.0968584Populationgrowth 0.0373749* 0.0259689Log(GDP) 0.1501982* 0.0693398 Short-runcoefficients ∆S/Y 0.2024749 0.0380458∆Populationgrowth -0.0644928* 0.0522266∆Log(GDP) 0.0567602 0.0382775CD-statistic -0.13p-value (0.8968)*-nullhypothesisofzerocoefficientcannotberejectedat1%,5%,and10%level.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

Basedonthesecondapproach,thecoefficientsforthevariablesofpopulationgrowthandlog(GDP)

entertheregressionwithstatisticallyinsignificantvalues,whichmeansthatneitherpopulation

growthnorthecountrysizehasaneffectontheinvestmentwhencommoncorrelatedeffectsare

controlledfor.Sincethesecondapproachhasanadvantageoverthefirstapproachduetoitsability

toaccountforboththesolvencyconstraintandcommoncorrelatedeffects,theresultsfromthe

conventionalapproachshouldbeconsideredwithcaution.Therefore,theoverallconclusionforthis

sectionisthatthedegreeofcapitalmobilityisindependentofbothpopulationgrowthandthe

countrysize;thusthetwovariablescannotexplainwhytheworldisnotcharacterizedbyperfect

capitalmobility.

42

Table17. ApproachII:robustnesstopopulationgrowthandcountry’ssize.

Coefficient Std.errorAdjustmentcoefficient -0.4697036* 0.0307393

∆S/Y 0.2942444* 0.0306292

∆Populationgrowth 0.0287049 0.0423832

∆Log(GDP) 0.0185142 0.031263

CD-statistic 1.25p-value (0.2098)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

4.6. Robustnesstotheglobalsavings

Table18and19summarizetheresultsofanotherrobustnesscheck,withtheoriginalmodelsbeing

alteredbyaddingtheextravariableofglobalsavings,(#/%)' .

Basedontheconventionalapproach,boththelong-runandtheshort-runcoefficientsonglobal

savingsarestatisticallysignificantandpossessexpectedpositivesigns.Theshort-runcoefficienton

globalsavingshasthevalueof0.161whichindicatesthatwhenglobalsavingsrisesby1percentage

point,domesticinvestmentincreasesby0.161percentagepoints.Sucharesulthasameaningful

interpretationsinceitisplausibletoexpectcountry-specificinvestmenttoreacttothechangesinthe

world’spoolofsavingsduetoincreasedinternationalfinancialliberalizationandintegration.Asfor

thecointegratingrelationship,thesignificanceofthelong-runcoefficientsondomesticandglobal

savingsindicatesthatthethreeseriesarecointegratedandformalong-runrelationship.However,

withthenewspecification,theadjustmentcoefficient,theshort-runandthelong-runcoefficientson

savingshaven’tchangedtheirmagnitudeorstatisticalsignificance,whichmeansthatthecoefficients

arerobusttotheadditionofthenewvariable.Therefore,eventhoughglobalsavingsentersthe

equationwithastatisticallysignificantvalueandpossessesaplausibleinterpretation,itcannot

possiblysolvethepuzzlingrelationshipbetweensavingsandinvestmentseries.

43

Table18. ApproachI:robustnesstotheglobalsavings.

Variable Coefficient StandarderrorAdjustmentcoefficient -0.4284009* 0.0153742

Long-runcoefficients S/Y 0.5397846* 0.0212227S/Y 0.5953064* 0.0982426Short-runcoefficients ∆S/Y 0.2225505* 0.0232936∆S/Y 0.1618681* 0.0900985CD-statistic 0.93p-value (0.3519)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

Basedonapproachtwo,thevariableoftheglobalsavingsenterstheequationwithastatistically

insignificantcoefficient.Theobtainedresultsindicatethattheglobalsavingslosetheirsignificance

whenboththebudgetconstraintandcommoncorrelatedeffectsarecontrolledfor.Thus,basedon

bothapproaches,itcanbeconcludedthatglobalsavingscannotexplainthelackofperfectcapital

mobilityworldwide.

Table19. ApproachII:robustnesstotheglobalsavings.

Coefficient Std.errorAdjustmentcoefficient -0.273869* 0.0175444

∆S/Y 0.2562813* 0.0268264

∆S/Y 0.2225505 0.0218468

CD-statistic 1.28p-value (0.2017)**-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.

44

Summaryandconclusions

ThisresearchhasrevisitedtheFeldstein-Horiokapuzzleoncapitalmobilityfortheworldpanelof

116countries,agroupofeconomicregions,freetradeareas,customsunions,pre-andpost-

Maastrichtperiods,pre-andpost-2008crisisperiods.First,agroupoffirst-generationandsecond-

generationpanelunitroottestshavebeenappliedtotheseriesofsavingsandinvestmenttosee

whethertheseriespossessaunitroot;theobtainedresultsconfirmthatboththesavingsand

investmentseriesarenon-stationaryinlevelsbutbecomestationaryinfirstdifferences.Afterthat,

Pedroni’s(1999)cointegrationtesthasbeenimplementedinordertoseewhetherthetwoseries

arecointegrated;theestimatedstatisticshaveconfirmedtheexistenceofalong-runrelationship

betweensavingsandinvestment.

Inordertoanalysethesaving-investmentrelationship,twodifferentapproacheshavebeen

utilized.Thefirstapproachortheconventionalapproachisbasedonanerror-correctionmodel

whichdistinguishesbetweentheshort-runandthelong-rundynamicsinsavingsandinvestment.

Thesecondapproachisbasedonamodelwiththelong-runcoefficientbeingfixedatthevalueof

oneandadjustmentparametersmeasuringlong-runcapitalmobility.Bothmodelshavebeen

estimatedusingtheCommonCorrelatedEffectsMeanGroup(CCEMG)estimator,whichhasan

advantageoverotherpanelestimatorsduetoitsabilitytoaccountforthecross-sectional

dependencebyintroducingthecross-sectionalaveragesofbothdependentandindependent

variablesasadditionalregressors.Theresultsfromthefirstapproachindicatethatthereisa

relativelyhighdegreeofcapitalmobilityintheshortrunwhereasthelong-runcapitalmobilityis

relativelymedium.Basedontheestimatesofthelong-runcoefficients,thecurrentaccounthasbeen

foundtobeastationaryprocessonlyforthesamplesofthepre-Maastrichtandpost-Maastricht

periodswiththelong-runcoefficientbeingequaltoonewhereastherestofthesamplesobserve

eitherthelong-runcoefficientsstatisticallynotdifferentfromzeroorstatisticallysignificant

coefficientswithanaveragevalueof0.508,whichindicatesamediumdegreeofcapitalmobilityin

thelongrun.However,duetotheunclearinterpretationofthelong-runcoefficientfromthefirst

approach,thesecondapproachhasbeendeveloped.Approachtwoisbasedonamodelwhich

accountsforthesolvencyconstraintbyfixingthevalueofthelong-runcoefficientatone.The

obtainedresultsindicatethatthelong-runcapitalmobilityisrelativelyhighinalltheanalysed

sampleswiththeexceptionofthepre-Maastrichtperiod,post-2008crisisperiod,andthreefree

tradeareas:ASEAN,LAFTA,andtheAndeanCommunity.Asfortheshort-termcoefficients,the

estimatesindicatethatallthesubsamplesobservehighcapitalmobilityintheshortrunwiththe

exceptionofthepre-MaastrichtperiodandG7.

45

Inaddition,thesignificanceandmagnitudeofthecoefficientsforthesampleof116countrieshave

beencheckedforrobustnessintheupgradedmodelswiththetwonewvariables:population

growthandsizeofthecountry.Theobtainedresultsindicatethatneitherofthevariablesare

statisticallysignificant,andconsequently,cannotexplainthelackofperfectcapitalmobility

worldwide.Anotherrobustnesscheck,basedonthemodelwithanextravariableofglobalsavings,

alsocannotexplainwhytheworldpaneldoesn’tobserveperfectcapitalmobility.

Thepotentialsuggestionsforthefutureresearchistoincreasethetimedimensionofthesamples

inordertoseewhethertheintertemporalbudgetconstraintcouldbemetintheconventional

error-correctionmodelwithoutfixingthelong-runcoefficientatthevalueofone.Anotherpotential

suggestioncouldbetoundertaketherobustnessanalysisofthecoefficientsinallthesubsamples

mentionedintheprevioussections.Additionally,therobustnessoftheresultscanalsobechecked

forthesampleswithdifferentexchangerateregimesinordertoseeinwhichwaythedegreeof

capitalmobilitycanbeaffectedbyvarioustypesofexchangerateregimes.

46

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