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Common factor panel methodologies are applied to investment and savings rates in the context of the Feldstein-Horioka puzzle to derive idiosyncratic components of the two variables for OECD countries, Japan, and Indonesia. The idiosyncratic components of the two variables in the national and regional data are analyzed using panel methodologies of unit root and cointegration tests. Bootstrap confidence intervals of the correlation coefficient and the relative variance ratio for the two variables are estimated to ascertain what, if any, relation exists between the mobility and the relative volatility of the two variables. The empirical examinations presented herein suggest that the puzzle is fading in recent times. This paper presents an attempt to alleviate somewhat contradictory views of the plausibility of this important puzzle in international macroeconomics expressed in the existing literature by presenting empirical results demonstrating the existence of the puzzle in one period, and demonstrating the puzzle fading away in the other periods.

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This paper extends the method of regressing production and sales variables on a set of seasonal dummy variables and a linear trend for empirical tests on the production smoothing hypothesis of inventory investment. Unit root testing procedures form the basis for constructing the bootstrap confidence intervals for the ratio of the variance of production to the variance of sales. Models used to test for a unit root when there are structural breaks in the linear time trend are converted to equations comprising deterministic and stochastic components. A limiting distribution of the test statistic is derived. Bootstrap resampling is conducted over deterministic parts of the converted equations to construct confidence intervals for the relative variance ratio for G7 countries. Primary findings for these countries are production-counter smoothing phenomena.