The Feldstein-Horioka Paradox – Evidence for Colombia during 1925-2011
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Keywords
Feldstein – Horioka puzzle, cointegration, Error Correction Model, imperfect capital mobility, Colombia
Abstract
This paper examines the relationship between national investment and saving in Colombia during the period 1925-2011. Consistent with Cardenas and Escobar (1998), an Error Correction Model is used to examine short and long run effects. The results provide evidence that investment and saving are co-integrated during the study period. The results for the co-integration vector, with and without structural breaks, indicate that capital mobility was low, which is consistent with the Feldstein – Horioka [1980] paradox. The results imply that increases in domestic saving rates reduce the mobility of financial capital in Colombia.
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References
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Barro, R. J., Grilli, V., y Febrero, R. (1997). MACROECONOMÍA: Teoría y Política. Madrid: McGRAW-HILL/INTERAMERICANA DE ESPAÑA, S.A.
Bai, J. y Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66, pp. 47–78.
Bai, J. y Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, Volume 18, Issue 1, pp. 1–22.
Calvo, G. A., y Vegh , C. A. (1993). Exchange-Rate-Based Stabilization under Imperfect Credibility. (H. Frisch, y A. Worgotter, Edits.) Open Economy Macroeconomics.
Cárdenas, M., y Escobar, A. (1998). Saving determinants in Colombia: 1925 - 1994. Journal of Development Economics, 57, 5-44.
Chow, G. C. (1960). Test of Equality Between Sets of Coefficients in Two Linear Regressions. Econometrica, 28(3), 591-605.
Christopoulos, D., y León-Ledesma, M. (2010). Current account sustainability in the US: What did we really know about it?. Journal of International Money and Finance, 29, 442-459.
Chu, K. H. (2012). The Feldstein-Horioka Puzzle and Spurios Ratio Carrelation. Journal of International Money and Finance, 31, 292-309.
De Vita, G., y Abbott, A. (2002). Are saving and investment cointegrated? An ARDL bounds testing approach. Economics Letters, 77, 293-299.
Dickey , D. A., y Fuller, W. A. (1981). Likelihood Ratio Statistics For Autoregressive Time Series With A Unit Root. Econometrica, 49, 1057-1071.
Dickey, D. A., y Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, 74, 427-431.
Edwards, S. (2006). The U.S. current account deficit: Gradual correction or abrupt adjustment? Journal of Policy Modeling, 28, 629-643.
Engle, R. F., y Granger, C. W. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2), 251-276.
Feldstein , M., y Horioka, C. (1980). Domestic saving and international capital flows. The Economic Journal, 90(358), 314-329.
Granger, C. W. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37, 424-438.
Gregory , A. W., y Hansen, B. E. (1996). Residual-based test for cointegration in models with regime shifts. Journal of Econometrics, 70, 99-216.
Guzel, A., y Ozdemir, Z. A. (2011). The Feldstein-Horioka puzzle in the presence of structural shifts: The case of Japan versus the USA. Research in International Business and Finance, 25, 195-202.
Hoffmann, M. (2004). International capital mobility in the long run and the short run: can we still learn from saving-investment data?. Journal of International Money and Finance, 23, 113 – 131.
Johansen , S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551 – 1580.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Econometric Dynamics and Control, 12(2-3), 231 – 254.
Johansen, S. y Juselius, K. (1990). "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169 – 210 .
Ketenci, N. (2012). The Feldstein-Horioka Puzzle in groupings of OECD members: a panel approach. Reseach in Economics.
Kwiatkowski, D., Phillips, P. C., Schmidt, P., y Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54, 159 – 178.
Levy, D. (2000). Investment - Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series. Review of Economic Dynamics, 3, 100 – 136.
Lumsdaine, R. L., y Papell, D. H. (1997). Multiple Trend Breaks and the Unit Root Hypothesis. Review of Economics and Statistics, 212 – 217.
MacKinnon, J., Haug, A., y Michelis, L. (1999). Numerical Distribution Functions of Likelihood Ratio Tests for Co-integration, Journal of Applied Econometrics, Vol. 14, pp. 563 – 577.
Narayan, P. K. (2005). The relationship between saving and investment for Japan. Japan an the WORLD ECONOMY, 17, 293 – 309.
Özmen, E., y Parmaksiz, K. (2003). Policy regime change and the Feldstein-Horioka puzzle: the UK evidence. Journal of Policy Modeling, 25, 137 – 149.
Pelagidis, T., y Mastroyiannis, T. (2003). The saving-investment correlation in Greece, 1960-1997: implications for capital mobility. Journal of Policy Modeling, 25, 609-616.
Reinhart , C. M., y Talvi, E. (1998). Capital flows and saving in Latin America and Asia: a reinterpretation. Journal of Development Economics, 57, 45-66.
Sachsida, A., y Caetano, M. A.-R. (2000). The Feldstein-Horioka puzzle revisite. Economics Letters, 68, 85-88.
Andrews, D., y Zivot, E. (1992). Futher evidence on the Great Crash, the oil price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10, 251-270.
Barro, R. J., Grilli, V., y Febrero, R. (1997). MACROECONOMÍA: Teoría y Política. Madrid: McGRAW-HILL/INTERAMERICANA DE ESPAÑA, S.A.
Bai, J. y Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66, pp. 47–78.
Bai, J. y Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, Volume 18, Issue 1, pp. 1–22.
Calvo, G. A., y Vegh , C. A. (1993). Exchange-Rate-Based Stabilization under Imperfect Credibility. (H. Frisch, y A. Worgotter, Edits.) Open Economy Macroeconomics.
Cárdenas, M., y Escobar, A. (1998). Saving determinants in Colombia: 1925 - 1994. Journal of Development Economics, 57, 5-44.
Chow, G. C. (1960). Test of Equality Between Sets of Coefficients in Two Linear Regressions. Econometrica, 28(3), 591-605.
Christopoulos, D., y León-Ledesma, M. (2010). Current account sustainability in the US: What did we really know about it?. Journal of International Money and Finance, 29, 442-459.
Chu, K. H. (2012). The Feldstein-Horioka Puzzle and Spurios Ratio Carrelation. Journal of International Money and Finance, 31, 292-309.
De Vita, G., y Abbott, A. (2002). Are saving and investment cointegrated? An ARDL bounds testing approach. Economics Letters, 77, 293-299.
Dickey , D. A., y Fuller, W. A. (1981). Likelihood Ratio Statistics For Autoregressive Time Series With A Unit Root. Econometrica, 49, 1057-1071.
Dickey, D. A., y Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, 74, 427-431.
Edwards, S. (2006). The U.S. current account deficit: Gradual correction or abrupt adjustment? Journal of Policy Modeling, 28, 629-643.
Engle, R. F., y Granger, C. W. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2), 251-276.
Feldstein , M., y Horioka, C. (1980). Domestic saving and international capital flows. The Economic Journal, 90(358), 314-329.
Granger, C. W. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37, 424-438.
Gregory , A. W., y Hansen, B. E. (1996). Residual-based test for cointegration in models with regime shifts. Journal of Econometrics, 70, 99-216.
Guzel, A., y Ozdemir, Z. A. (2011). The Feldstein-Horioka puzzle in the presence of structural shifts: The case of Japan versus the USA. Research in International Business and Finance, 25, 195-202.
Hoffmann, M. (2004). International capital mobility in the long run and the short run: can we still learn from saving-investment data?. Journal of International Money and Finance, 23, 113 – 131.
Johansen , S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551 – 1580.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Econometric Dynamics and Control, 12(2-3), 231 – 254.
Johansen, S. y Juselius, K. (1990). "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169 – 210 .
Ketenci, N. (2012). The Feldstein-Horioka Puzzle in groupings of OECD members: a panel approach. Reseach in Economics.
Kwiatkowski, D., Phillips, P. C., Schmidt, P., y Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54, 159 – 178.
Levy, D. (2000). Investment - Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series. Review of Economic Dynamics, 3, 100 – 136.
Lumsdaine, R. L., y Papell, D. H. (1997). Multiple Trend Breaks and the Unit Root Hypothesis. Review of Economics and Statistics, 212 – 217.
MacKinnon, J., Haug, A., y Michelis, L. (1999). Numerical Distribution Functions of Likelihood Ratio Tests for Co-integration, Journal of Applied Econometrics, Vol. 14, pp. 563 – 577.
Narayan, P. K. (2005). The relationship between saving and investment for Japan. Japan an the WORLD ECONOMY, 17, 293 – 309.
Özmen, E., y Parmaksiz, K. (2003). Policy regime change and the Feldstein-Horioka puzzle: the UK evidence. Journal of Policy Modeling, 25, 137 – 149.
Pelagidis, T., y Mastroyiannis, T. (2003). The saving-investment correlation in Greece, 1960-1997: implications for capital mobility. Journal of Policy Modeling, 25, 609-616.
Reinhart , C. M., y Talvi, E. (1998). Capital flows and saving in Latin America and Asia: a reinterpretation. Journal of Development Economics, 57, 45-66.
Sachsida, A., y Caetano, M. A.-R. (2000). The Feldstein-Horioka puzzle revisite. Economics Letters, 68, 85-88.