The Feldstein-Horioka Puzzle, Saving-Investment Causality and International Financial Market Integration

Abstract

We review the Feldstein-Horioka (1980) approach to the measurement of the degree of international capital mobility by the size of the saving-investment correlation; we conclude that it raises many problems. Instead, we employ Granger causality tests to measure capital mobility using quarterly data for a sample of 7 industrialised economies for a) the post-war period; and b) the 1980s and 1990s. For the cointegrated saving and investment ratios in the entire sample (Australia-UK), causality goes from saving to investment. For the single (German) cointe-grated pair of the 1980s and 1990s, causality runs in the opposite direction. We interpret this as evidence of increased international financial market integration post-1980.