Assessing International Capital Mobility in East Asian Economies: A Panel Error-Correction Approach

Abstract

This study assesses financial integration and the degree of international capital mobility in the East Asian region by analyzing the dynamics of national saving-investment relationships. Following the work of Pelgrin & Schich (2004), we interpret the close relationship between national saving and investment in the long run reflecting a solvency constraint and focus on the short term saving investment analysis relationship to assess the degree of capital mobility. Applying the panel error – correction technique proposed by Pesaran et al. (1999), our empirical results suggest that there exists a long-run relationship between saving and investment and that the short-run is driven by the extent of the gap between current and long-run equilibrium values. The low estimated values of the short-run coefficient of the changes in the saving rate signal some degree of capital mobility.

Key Words:

• Dynamic heterogeneous panels
• international capital mobility
• Feldstein-Horioka puzzle

JEL CLASSIFICATIONS:

• F15
• F21
• F36

Acknowledgment

The authors thank the editor of this journal and an anonymous referee for helpful comments and suggestions on the earlier draft of the paper. All remaining errors are the sole responsibility of the authors.

Notes

1. A very low and insignificant , however, indicates that the use of an error correction approach is not appropriate. As long as is statistically significant different from zero, can be taken as an indicator of capital mobility.

2. The PARDL are robust to the order of integration. Nevertheless, the series are I(2) based on the methodology developed by Im et al. (2003) for panel data. The results are available from the authors upon request.

3. Pesaran et al. (1999) show that while the ARDL-AIC and the ARDL-SC estimates have very similar small-sample performances, the ARDL-SC perform slightly better in the majority of the experiments. This may reflect the fact that the Schwartz Criterion is a consistent model selection criterion while Akaike is not.