Monetary and Economic Studies Vol.13, No.1 / July 1995

Feldstein-Horioka Paradox Revisited

Hiroshi Fujiki, Yukinobu Kitamura

A central concern in the field of international finance is always capital mobility. Feldstein and Horioka (1980) propose a simple test for international capital mobility and obtain a sign of very low capital mobility. Their interesting result is often described as the Feldstein-Horioka paradox. This paper reexamines their study using panel data analysis. Following the standard model selection procedure, preferred estimators of the elasticity of domestic investment-GDP ratio on domestic saving-GDP ratio are always significantly lower than one. In the light of our results, the Feldstein-Horioka paradox turns out to be not so robust because of cross country heterogeneities.

Keywords: Panel Data; International Capital Mobility; Feldstein-Horioka Paradox.

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1995 Bank of Japan All Rights Reserved.

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