Testing the validity of the Feldstein-Horioka hypothesis in the next 11 countries: Time series analysis

The increase in globalisation in the 1980s, the disappearance of economic borders and the increase in capital mobility have enabled countries to direct their capital accumulation to various geographies. Feldstein and Horioka (1980) tried to explain the relationship between domestic savings and domestic investments in free economies depending on the degree of capital mobility. The hypothesis argues that the relationship between domestic savings and domestic investment will weaken in cases of increased capital mobility. On the contrary, they argued that in an economy with restrictions on capital movements, there would be a relationship between domestic savings and domestic investments. However, Feldstein and Horioka (1980), in their study, encountered a result contrary to the hypothesis and caused a new paradox to take its place in the literature as "Feldstein-Horioka Puzzle". The relationship between domestic savings and domestic investment has been analysed for "Next Eleven Countries (N11)" within the framework of Feldstein-Horioka Hypothesis. Fourier cointegration test and Fully Adjusted Least Squares (FMOLS) and Ordinary Least Squares (OLS) methods were used for the analysis based on different period intervals. As a result of the results obtained from the study, the coefficient of saving retention was found to be 0.44 for Turkey, 0.28 for Indonesia, 0.53 for Nigeria, 0.23 for Bangladesh, 0.20 for Egypt and 0.48 for Iran. The obtained coefficients indicate relatively high capital mobility and a low level of relationship between domestic savings and domestic investment. The results confirm the expectation that the financing of domestic investments expected in an economy without capital restrictions will be met by foreign capital flows. Therefore, Feldstein-Horioka's assumptions are valid in six N11 countries, namely Turkey, Indonesia, Nigeria, Bangladesh, Egypt and Iran.