Domestic Savings and International Capital Flows in the EU
DOI:
https://doi.org/10.5755/j01.eis.1.17.34325Keywords:
domestic savings, domestic investment, capital mobility, tax incidence, optimal savings policy, European UnionAbstract
This paper uses new statistical estimates to test for effects of economic integration in Europe on international capital mobility. In a world of perfect capital mobility, one should experience little or not statistically significant relationship between the amount of domestic savings and domestic investment. Alternatively, under less-than perfect capital international mobility, diverse portfolio preferences and country-specific transactions costs would create impediments for long-term capital flows. This would result in direct connection between any changes (increases) in domestic savings and domestic investment. According to empirical results of a similar empirical study by Feldstein and Horioka (1980) for developed countries (including some of current EU members included in this investigation), there were portfolio preferences and institutional rigidities, which resulted in almost equal corresponding differences in domestic investment rates driven by domestic savings rates among major industrial countries.
The current study tests for capital mobility in the EU Member States (2010-2020) discussing compatibility of findings with previous evidence found in the literature (Feldstein and Horioka 1980). It also addresses the optimal national savings policy, tax incidence and concludes on capital formation in the EU.
References
Apergis, N. & Tsoumas C. (2009). A survey of the Feldstein-Horioka Puzzle: What has been done and where we stand. Research in Economics, 63, 64-76. DOI: http://dx.doi.org/10.1016/j.rie.2009.05.001
Byrne, J., Fazio, G. & Fiess, N. (2009) The Global Side of the Investment-Saving Puzzle. Journal of Money, Credit and Banking, 41, 1033-1040. DOI: http://dx.doi.org/10.1111/j.1538-4616.2009.00244.x
Bywaters, D. & Mlodkowski, P. (2012). The Role of Transactions Costs in Economic Growth. International Journal of Economic Policy Studies, 7, 53 – 66. DOI: http://dx.doi.org/10.1007/BF03405737
Daugeliene, R. & Mlodkowski, P. (2014). Pattern of Financial Flows within the European Union: First Insights about Creditor-Debtor Country Relationship. European Integration Studies: Research and Topicalities, 8, 48-55. DOI: http://dx.doi.org/10.5755/j01.eis.0.8.7014
Drakos, A. A., Kouretas, G. P. and Vlamis, P. (2018). Saving, Investment and Capital Mobility in EU Member Countries: A Panel Data Analysis of the Feldstein-Horioka Puzzle. Applied Economics, 50, 3798-3811. DOI: https://doi.org/10.1080/00036846.2018.1436150
Eaton, J, Kortum S. S. & Neiman B. (2015). Obstfeld and Rogoff’s international macro puzzles: A quantitative assessment. NBER Working Paper No 21774, National Bureau of Economic Research, Cambridge, MA.
Feldstein, M. (1977). Does the U.S. Saves too Little? American Economic Review, 67:1, 116-121.
Feldstein, M. & Horioka, C. (1980). Domestic Saving and International Capital Flows. Economic Journal, 90, 314-329. https://doi.org/10.2307/2231790
Feldstein, M. & Summers, L. (1977). Is the Rate of profit Falling? Brookings Papers on Economic Activity, 1.
Ford, N. & Horioka, C. Y. (2017). The ‘real’ explanation of the Feldstein-Horioka puzzle. Applied Economics Letters, 24, 95-97. DOI: https://doi.org/10.1080/13504851.2016.1164814
Ford, N. & Horioka, C. Y. (2016). The ‘real’ explanation of the PPP puzzle. Institute of Social and Economic Research, Discussion Paper No 969, Osaka University, Ibaraki, Osaka, Japan.
Ginama, I., Hayakawa, K. & Kanmei, T. (2018). Examining the Feldstein-Horioka Puzzle Using Common Factor Panels and Interval Estimation. Japan and the World Economy, 48, 11-21. DOI: https://doi.org/10.1016/j.japwor.2018.06.001
Ginama, I. , Hayakawa, K. & Kanmei, T. (2021). Transition of the Feldstein-Horioka Puzzle. Journal of Mathematical Finance, 11, 123-151. DOI: 10.4236/jmf.2021.111006.
Harberger, A. (1962). The Incidence of Corporate Income Tax. Journal of Political Economy, 70, 215-240
Katsimi, M. and Zoega, G. (2016) European Integration and the Feldstein-Horioka Puzzle. Oxford Bulletin of Economics and Statistics, 78, 834-852. DOI: https://doi.org/10.1111/obes.12130
Miezkowski, P. (1969). Tax Incidence Theory: The Effects of Taxes on Income Distribution. Journal of Economic Literature, 7:4, 1103-1124.
Mishkin, F. S. (1984). Are real interest rates equal across countries: An empirical investigation of international parity conditions. Journal of Finance, 39: 1345-1357. DOI: http://dx.doi.org/10.1111/j.1540-6261.1984.tb04911.x
Mlodkowski, P. (2013). European Integration, Transaction Costs and the Efficiency of Economic Processes. European Integration Studies: Research and Topicalities, 7, 102-109. DOI: http://dx.doi.org/10.5755/j01.eis.0.7.4080
Mlodkowski, P. & Tastulekova, A. (2012). Performance of Capital Markets in the EU and Turkey. A Cointegration Analysis. European Integration Studies: Research and Topicalities, 6, 160-167. DOI: http://dx.doi.org/10.5755/j01.eis.0.6.1517
Mlodkowski, P. (2011). Foreign Exchange Reserve Management in the EUROZONE and the Global Interest Rates. European Integration Studies: Research and Topicalities, 5, 145-151. DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1090
Obstfeld, M. & Rogoff K. (2000). The six major puzzles in macroeconomics: Is there a common cause?” in B. S. Bernanke and K. Rogoff (eds), NBER Macroeconomics Annual 2000, 15: 339-412.
Shoven, J. & Whalley, J. (1972). A General Equilibrium Calculation of the Effects of Differential Taxation of Income from Capital in the U.S. Journal of Public Economics, 1, 281-321.
Yasutomi, A. & Horioka, C.Y. (2011). Adam Smith’s Answer to the Feldstein-Horioka Paradox: The Invisible Hand Revisited. Economics Letters, 110, 36-37. DOI: https://doi.org/10.1016/j.econlet.2010.09.018
Younas, J. & Chakraborty, D. (2011). Globalization and the Feldstein-Horioka Puzzle. Applied Economics, 43, 2089-2096. https://doi.org/10.1080/00036840903035985
Downloads
Published
Issue
Section
License
This article is an Open Access article distributed under the terms and conditions of the Creative Commons Attribution 4.0 (CC BY 4.0) License (http://creativecommons.org/licenses/by/4.0/).
