The Feldstein Horioka puzzle in E7 countries: Evidence from panel cointegration and asymmetric causality analysis

Abstract

In this study, the Feldstein-Horioka (FH) puzzle were investigated by the panel cointegration and causality methods over the available period of 1989-2015 for the E7 countries. Westerlund panel cointegration test with multiple structural breaks, and Westerlund and Edgerton regime panel cointegration test results indicate that there is a cointegration relationship between the two variables in the long term. The long-term FH panel coefficients obtained from common correlated effects mean group (CCMEG) and augmented mean group (AMG) estimators are 0.792 and 0.758, respectively. The findings of the Konya bootstrap panel Granger causality test show that there is no causality relationship between the two variables in the short term. However, in the results of the asymmetric causality test, unidirectional and statistically significant causality is going from the negative shocks of domestic saving to the positive shocks of investment for China, Indonesia, Mexico and Turkey. The overall results show that the FH puzzle is valid for the E7 countries.