Academic journal article The European Journal of Comparative Economics

Capital Mobility in the Panel GMM Framework: Evidence from EU Members

Academic journal article The European Journal of Comparative Economics

Capital Mobility in the Panel GMM Framework: Evidence from EU Members

Article excerpt

1. Introduction

Many studies on international capital mobility in the literature have been inspired by the seminal work of Feldstein and Horioka (1980), who examined the level of capital mobility in OECD countries, estimating the following equation:

[(IYR).sub.it] = [[alpha].sub.0] + [beta][(SYR).sub.it] + [e.sub.it] (1)

Where IYR is the ratio of gross domestic investment to gross domestic product, JYR is the ratio of the gross domestic savings to the gross domestic product of the country i at period t. Coefficient [beta], which is known as a saving retention coefficient, measures the degree of capital mobility. High international capital mobility refers to low correlation between investments and saving flows, or the value of [beta], is supposed to be close to 0. A low level of capital mobility in a country suggests a low correlation between investments and saving flows, or the value of the saving retention coefficient is supposed to be close to 1, indicating the capital immobility of the country. Feldstein and Horioka (1980) found that the value of the saving retention coefficient for developed countries is closer to 1 than to 0 value, illustrating by this international capital immobility in the estimated countries. These controversial results gave start to widespread debates in the economic literature. Numerous studies have provided evidence supporting these results, but other results exist in the literature with a wide array of interpretations.

Various literature reviews were made related to the Feldstein Horioka Puzzle, for example, Tesar (1991), Frankel (1992), Coakley et al. (1998), Obstfeld and Rogoff (2000), and the latest updated literature review by Apergis and Tsoumas (2009). Obstfeld and Rogoff (2000) referred to the findings of Feldstein and Horioka (1980), which are indeed contrary to economic theory, as "the mother of all puzzles." Frankel (1992) argued that the Feldstein Horioka puzzle is not that surprising as it can be explained by the failure of some form of interest rate parity, for which arguments such as transaction costs and regulations can be made. The author suggested that the high value of the coefficient may be due to the procyclicality of savings and investments. Obstfeld and Rogoff (2000) suggested that the high value of the saving retention coefficient is due to the "home bias" in investor preferences. Apergis and Tsoumas (2009) concluded that the results of the majority of studies support a high correlation between savings and investments, but at a lower level. At the same time, they indicate that most studies do not validate the capital mobility hypothesis.

Most empirical studies with panel data have concentrated on large samples of OECD countries following the work of Feldstein and Horioka (1980) (see, for example, Ho 2002, 2003; Fouquau et al., 2008; Adedeji and Thornton, 2008; Ketenci, 2013), or on smaller samples of OECD countries (Georgopoulos and Hejazi, 2009; Rao et al., 2010; Narayan and Narayan, 2010). Another group of studies narrows its focus to EU countries (for example, Feldstein and Bachetta, 1991; Artis and Byoumi, 1991; Banerjee and Zanghieri, 2003; Telatar et al., 2007; Kollias et al., 2008; Ketenci, 2012).

Fouquau et al. (2008) in their study on OECD countries employed a panel smooth threshold regression approach proposed by Gonzalez et al. (2005) that can capture heterogeneity across countries and the time variability of the saving retention coefficient. The threshold variables considered in the study by Fouquau et al. (2008) are the economic growth of the analyzed countries, demography, degree of openness, country size, and current account balance. The authors found that the highest impacts on the international capital mobility are degree of openness, country size, and current account balance. It was found that the countries in the sample have a heterogeneous degree of international capital mobility, and that the estimated saving retention coefficients have a tendency to decline in the estimated period, between 1960 and 1990. …

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