The Feldstein-Horioka puzzle and twin deficits in selected countries

Abstract

Hysteresis (unit root) of the current account, fiscal balance, and investment shares is found for the majority of industrial countries as well as selected emerging and transition economies between 1970 and 2001. Twin deficits are defined as a positive long-run relationship between the current account and the fiscal balance. The paper provides evidence for twin deficits in several countries, although we can see differences between the 1990s and the 1990s. Investment in some EU countries is financed to a relatively high degree at the international financial markets implying that the Feldstein-Horioka puzzle is less important in the EU. © 2003 Kluwer Academic Publishers.