CAPITAL MOBILITY AND THE FELDSTEIN-HORIOKA PUZZLE: RE-EXAMINATION OF LESS DEVELOPED COUNTRIES

This empirical study extends the work of (Manchester School, Vol. 72 (2004), pp. 569-590) with respect to the Feldstein-Horioka puzzle for a sample of 47 developing countries. The study examines the savings-investment relationship through a comparison of the Feldstein-Horioka cross-section estimator results with the results obtained from a mean group estimator allowing for the cross-section dependence and permanent shocks to the current account. The mean group estimator results indicate higher capital mobility with a savings coefficient of 0.36, 25 per cent lower than the estimates based on the cross-section estimator, for the whole sample with little variation across subregions. Copyright � 2006 The Authors; Journal compilation � 2006 Blackwell Publishing Ltd and The University of Manchester.