A long-run relationship between investment and saving: revisting the Feldstein-Horioka puzzle

Treball Final de Grau en Economia. Codi: EC1049. Curs acadèmic: 2018-2019The aim of this paper is to analyse the Feldstein-Horioka puzzle using cointegration tests with breaks. The puzzle consisting of finding a high correlation between investment and saving in countries where trade barriers had been eliminated. During the second half of the 20th century, the countries of our sample started a commercial and financial integration process. Despite this fact, these two variables have been found to be highly correlated. Using annual time series data, we first test for the existence of unit roots. Secondly, in order to find if there is relationship between investment and savings, we test for cointegration having into account the potential presence of instabilities in the relationships. In addition, including structural breaks in our regressions will help us to relate the unexpected increases/decreases in saving retention coefficient to the most relevant economic facts that may explain it