Financial development, exchange rate regimes and the Feldstein–Horioka puzzle: evidence from the MENA region

Abstract

This paper investigates whether the Feldstein and Horioka (1980) argument on domestic saving-investment relationship is supported by the data of the countries in the Middle East and North Africa (MENA) region when the financial development levels and exchange rate regimes are taken into account. To this end, we employ both the ARDL bounds cointegration test and panel mean group procedures. The results support the view that a successful international financial integration requires compatible levels of financial intermediation. The evidence also suggests that saving-investment cointegration is not invariant to exchange rate regimes.

The Feldstein-Horioka Puzzle and Spurious Ratio Correlation

“…These include Coakley et al (1999) for LDCs, Blanchard and Giavazzi (2002) and Kapopoulos and Paleologos (2004) for the Euro Area, Kim et al (2005) for Asian countries, and Ozmen (2007) for Middle East and North African countries, to name just a few. Although in many cases the savinginvestment correlation is weaker than in the OECD countries, no consensus has been reached.…”

An Investigation of the Feldstein–Horioka Puzzle for the Association of Southeast Asian Nations Economies

“…Apergis and Tsoumas () concluded that although the majority of empirical studies found evidence opposing the original strong results for the F–H paradox, they found this correlation to still exist in weaker form. Ozmen () showed that, in a fixed exchange regime, the savings retention coefficient is higher than in a flexible exchange rate regime and that legal protection for investors and capital tends to be more mobile internationally than in countries with weaker investor protection. Murphy () argued that if a country is large enough to affect the world interest rate, an increase in national savings would lead to a reduction in the world interest rate, thereby increasing domestic investment.…”

“…They found the saving–investment correlation β to be only 0.12 less than for the F–H puzzle. Ozmen () investigated whether the relation of financial development and investment provides evidence for the F–H puzzle and argued that the domestic savings–investment relationship is supported by data for countries in the Middle East and North African region. The findings supported the hypothesis that successful international financial integration requires compatible levels of financial intermediation.…”

“…Recently, the empirical literature has shown several comprehensive studies based on the F–H puzzle (see Di Iorio and Fachin ; Ozmen ; Apergis and Tsoumas ; Fouquau, Harlin and Rabard ; Rao, Tamazian and Kumar ; Bangake and Eggoh ). Feldstein and Horioka () and Feldstein () estimated the β ‐coefficient of national savings to be 0.887, with a standard error of 0.07.…”

“…Existing empirical studies on the F–H puzzle have used cross‐sectional panel data and time series methods for estimation. Such studies have been carried out for regional economies including the Middle East and North Africa (Ozmen ), a group of 37 African countries (Bangake and Eggoh ), the OECD countries (Feldstein and Horioka ; Tesar ; Coakley, Fuertes and Spagnolo ; Giannone and Lenza ; Katsimi and Moutos ; Fouquau, Hurlin and Rabaud ), the European Union (Di Iorio and Fachin ; Telatar, Telatar and Bolatoglu ) and the United States (Grier, Lin and Ye ).…”