A regime switching approach to the Feldstein–Horioka puzzle: Evidence from some European countries

Revisiting the Feldstein–Horioka puzzle with regime switching: New evidence from European countries

“…The theoretical roots of this argument can be found in the Lucas critique stating that the parameter estimates in any structural macroeconomic model should shift as the policy regime changes through their effects on the expectations of private economic agents. Telatar et al (2007) apply a Markov switching model and find that the correlation coefficients are unstable due to the policy regime changes, a finding that is consistent with the Lucas critique. This paper picks up Telatar et al's (2007) idea and re-investigates the FHP in the presence of regime shifts for the case of nine European countries.…”

“…Many researchers examine the Feldstein-Horioka puzzle by using panel data together with the panel cointegration approach (e.g., Jansen, 2000;Corbin, 2001;Ho (2002); Kim et al (2005); Kollias et al (2006); Chakrabarti (2006); Christopoulos (2007); Adedeji and Thornton (2008); ; Bangake and Eggoh (2011);Ketenci (2013)). 2 Instead of adopting the panel cointegration approach, a number of researchers focus on the role of policy regime changes (see, for example, Ho (2000); Parmaksiz (, 2003a, 2003b); Telatar et al, (2007); Hatemi-J and Hacker (2007); Kejriwal (2008); Rao et al (2010); Ketenci (2012)). The main findings of these researchers suggest that policy regime changes introduce structural breaks which provide stronger evidence of cointegration between the investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks is ignored.…”

“…The main findings of these researchers suggest that policy regime changes introduce structural breaks which provide stronger evidence of cointegration between the investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks is ignored. Parmaksiz (2003a, 2003b) and Telatar et al (2007) highlight the fact that international capital mobility is essentially a time-varying phenomenon that cannot be represented by one fixed coefficient. The theoretical roots of this argument can be found in the Lucas critique stating that the parameter estimates in any structural macroeconomic model should shift as the policy regime changes through their effects on the expectations of private economic agents.…”

“…This paper picks up Telatar et al's (2007) idea and re-investigates the FHP in the presence of regime shifts for the case of nine European countries. In line with Telatar et al (2007), we adopt the Markov switching model in this study. 3 The merit of this approach is that it allows us to distinguish periods in which the FHP holds from those in which the FHP does not hold.…”

The Savings-Investment Relationship: Cointegration and Causality Evidence From Uemoa Countries

“…This finding is attributed to higher capital mobility, lower transaction costs in the international capital markets, and the declining status of long-run current account targeting as a primary government objective. Telatar, Telatar, and Bolatoglu (2007) re-examine the savings-investment nexus using data for some European countries. Applying a Markov-switching model with heteroskedastic disturbances, they find that the correlation coefficients are unstable due to the policy regime changes consistent with the Lucas critique.…”