The Feldstein-Horioka Puzzle: A Comparative Study of Developed and Emerging Market Economies

Many studies have discussed the Feldstein-Horioka (1980) puzzle which is the correlation between domestic savings and domestic investments that is found empirically. My paper analyses the cross-sectional regression of domestic investments on domestic savings using different empirical tests across 45 countries which include both developed and emerging market economies over a period of 40 years from 1970-2009. This paper shows that by considering unobserved heterogeneity among countries the extent of the Feldstein-Horioka puzzle is reduced and these results are backed up by econometric tests like the Pooled Estimated Generalised Least Squares test (EGLS) and the Mean Group test (MG test) as explained by Coakley, Fuertes and Smith (2001). Keywords?Feldstein-Horioka Puzzle, Domestic Savings, Domestic Investments, Capital mobility.