NATIONAL SAVING-INVESTMENT RELATIONSHIP AND … · HORIOKA PUZZLE REVISITED Aantal woorden / Word...
Transcript of NATIONAL SAVING-INVESTMENT RELATIONSHIP AND … · HORIOKA PUZZLE REVISITED Aantal woorden / Word...
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.
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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
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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:
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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)
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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)
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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)
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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
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(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
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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
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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.
Coefficient Std.error
Developedeconomies
Adjustmentcoefficient
-0.2143853(-5.04)* 0.0425624
∆S/Y 0.2890824(5.25)* 0.0550734
CD-statistic -1.09p-value (0.2778)
Developingeconomies
Adjustmentcoefficient
-0.0760615(-3.34)* 0.0227543
∆S/Y 0.1438495(4.09)* 0.0351346
CD-statistic -1.05p-value (0.2949)
OECDcountries
Adjustmentcoefficient
-0.1890626(-6.69)* 0.0282549
∆S/Y 0.2018538(4.21)* 0.0479634
CD-statistic -1.62p-value (0.1044)
Non-OECDcountries
Adjustmentcoefficient
-0.0443395(-2.21)** 0.0200388
∆S/Y 0.138981(4.20)* 0.0330668
CD-statistic -0.51p-value (0.6120)
GroupofSeven(G7)
Adjustmentcoefficient
-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.
Coefficient Std.error
AsiaandthePacific
Adjustmentcoefficient
-0.2330471(-6.86)* 0.0339509
∆S/Y 0.1571965(2.16)** 0.0727699
CD-statistic -1.31p-value (0.1886)
LatinAmericaandtheCaribbean
Adjustmentcoefficient
-0.2730756(-6.43)* 0.0424476
∆S/Y 0.2199877(4.97)* 0.0563231
CD-statistic -2.20p-value (0.0575)***
Africa
Adjustmentcoefficient
-0.3069722(-9.90)* 0.0309947
∆S/Y 0.2180294(8.12)* 0.0366995
CD-statistic -1.31p-value (0.1886)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.
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.
Coefficient Std.error
EuropeanEconomicArea(EEA)+Switzerland
Adjustmentcoefficient
-0.2260521(-4.70)* 0.0480678
∆S/Y 0.2560777(3.93)* 0.0652254
CD-statistic -1.08p-value (0.2786)
NorthAmericanFreeTradeAgreement(NAFTA)
Adjustmentcoefficient
-0.1363289(-2.05)** 0.0665462
∆S/Y 0.2564985(2.74)* 0.0936346
CD-statistic -1.31p-value (0.1886)
AssociationofSoutheastAsianNations(ASEAN)
Adjustmentcoefficient
-0.4497442(-3.71)* 0.1212394
∆S/Y 0.296663(1.97)**
0.1509153
CD-statistic -1.62p-value (0.1044)
LatinAmericanFreeTradeAssociation(LAFTA)
Adjustmentcoefficient
-0.3666112(-6.26)* 0.0585242
∆S/Y 0.289974(3.01)* 0.0963524
CD-statistic -1.40p-value (0.1612)
TheAndeanCommunity
Adjustmentcoefficient
-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.
Coefficient Std.error
Mercosur
Adjustmentcoefficient
-0.0951646(-4.25)* 0.0223772
∆S/Y 0.0718631(0.41) 0.1741731
CD-statistic 1.28p-value (0.2018)
EuropeanUnion(EU)
Adjustmentcoefficient
-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.
Coefficient Std.error
Pre-Maastrichtperiod
Adjustmentcoefficient
-0.515811(-3.16)*
0.4158472
∆S/Y 0.5728278(1.98)** 0.289747
CD-statistic -0.70p-value (0.4828)
Post-Maastrichtperiod
Adjustmentcoefficient
-0.2482561(-4.31)*
0.1039787
∆S/Y 0.3214063(3.21)
0.1000404
CD-statistic -1.31p-value (0.1886)*-denotessignificanceat1%level;**-indicatessignificanceat5%level;***-denotessignificanceat10%level.t-valuesarereportedinparentheses.Pesaran’s(2015)CD-statisticteststhenullhypothesisofweakcross-sectionaldependenceacrosserrortermsagainstthealternativehypothesisofstrongcross-sectionaldependenceacrosserrorterms.
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.
Coefficient Std.error
Pre-2008crisis
Adjustmentcoefficient
-0.2095547(-14.36)* 0.0215564
∆S/Y 0.2264512(8.39)* 0.0317425
Hausman’stest -0.94p-value (0.3450)*
Post-2008crisis
Adjustmentcoefficient
-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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