Saving-Investment Correlation and Capital Mobility- Feldstein and Horioka Approach

The purpose of this paper is to investigate the existence of capital mobility in 10 newly emerging economies by using a model presented first in Feldstein and Horioka (1980). In Feldstein Horioka paper, the beta coefficient (b value) is estimated to measure the relationship between domestic investment and savings. In their original work, Feldstein and Horioka estimated a beta coefficient of 0.87, close to 1, which indicates low capital mobility contrary to the standard economy theory of perfect capital mobility. Using an annual data from 1997-2013 and panel data econometrics regression to test the relationship between savings and investment, we find results that are contradictory to that of Feldstein and Horioka puzzle. In this study, we got a relatively lower beta coefficient indicating there is some extent of capital mobility in the countries we sampled. We carried out further analysis by including the percentage GDP growth rate and inflation rate as control variables in the model since these variables are factors that influences a nation’s domestic investment. Regardless, the saving retention coefficient from all the regression results in this paper is below 0.5, which is relatively far from 1, implying that there is a degree of capital mobility among the sampled countries. Keywords: Saving, Investment, Correlation, Panel data, and Capital mobility.