The Feldstein-Horioka puzzle in the presence of structural breaks: evidence from China

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Yildirim D., ORMAN E. E.

JOURNAL OF THE ASIA PACIFIC ECONOMY, vol.23, no.3, pp.374-392, 2018 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Volume: 23 Issue: 3
  • Publication Date: 2018
  • Doi Number: 10.1080/13547860.2017.1396640
  • Journal Indexes: Social Sciences Citation Index, Scopus
  • Page Numbers: pp.374-392
  • Keywords: Feldstein-Horioka puzzle, capital mobility, exchange rate regimes, 2008-2009 global financial crises, structural breaks, China, INTERNATIONAL CAPITAL MOBILITY, EXCHANGE-RATE REGIMES, OIL-PRICE SHOCK, GREAT CRASH, INVESTMENT, COINTEGRATION, TESTS, UK


This study explores the empirical validity of the Feldstein-Horioka puzzle for China in the presence of structural breaks. As such, we employ a recently proposed multiple-break cointegration test. Once the existence of the cointegration between domestic savings and investment is ensured by allowing for endogenous structural breaks, Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimation procedures are implemented to obtain reliable inferences. Empirical results reveal that the relationship between Chinese domestic savings and investment has undergone some major changes. More specifically, with the introduction of managed floating exchange rate regime, a substantial reduction is observed in the almost unitary saving retention coefficient of the fixed exchange rate period. Furthermore, the correlation has experienced a slight increase since 2009, which coincides with the worldwide protectionist policies adopted in the depth of the global financial crisis.