International capital mobility in West Africa: A panel cointegration approach

Abstract

The study investigates the status of international capital mobility in West Africa using the saving retention coefficient of Feldstein–Horioka hypothesis. The hypothesis is predicated on the fact that, with perfect capital mobility, domestic investment does not depends on domestic savings but depends on the pool of international savings. Panel data on domestic savings and domestic investments of 13 West African countries, spanning from 1980 to 2011 are used to run a series of long-run relations. After establishing the presence of cointegration relationship between the two variables, the saving retention coefficient is estimated using the pooled mean group (PMG), fully modified OLS (FMOLS) and the dynamic OLS (DOLS). The results from these long-run estimators show low value of saving retention coefficient, signifying low association between domestic savings and domestic investment and hence higher capital mobility in West Africa. The result also confirmed that the Feldstein–Horioka puzzle does not hold for West Africa. However, the presence of free and higher capital mobility in the continent could be a signal that the use of monetary policy in domestic economic stabilization is increasingly becoming ineffective, especially in the long-run. The finding suggests the establishment of monetary union in the region.

Keywords:

• saving retention coefficient
• domestic investment
• domestic savings international capital mobility
• panel cointegration

Public Interest Statement

Free movement of capital resources among countries ensures efficient distribution of societal resources and bridges the gap between demand and supply of investible funds. It also assists in consumption smoothing, risk diversification, and caters for the investment needs of capital-scarce countries. This implies that ascertaining the level of capital movement across countries is vital for policy prescriptions, especially on issues related to monetary policies, import–export policies, and exchange rate determinations. This study investigates the status of international capital mobility across West African countries, using the Feldstein–Horioka approach. Thirteen West African countries are analyzed and the result established evidence of high cross-border capital mobility across the countries and by implication disproved the celebrated Feldstein–Horioka puzzle. The finding further implies that individual country’s monetary policy autonomy is reduced, as investment and interest rates cannot be exclusively determined domestically. Formation of monetary union for the region is therefore feasible.

Notes

1. FH puzzle is considered one of the six puzzles identified in the field of international macroeconomics (Obstfeld & Rogoff, 2001). “It is termed a puzzle because it is an awkward empirical fact that refuses to comply with the established theoretical framework” (Coakley, Kulasi, & Smith, 1998).

Additional information

Notes on contributors

Ibrahim Bakari Hassan

Ibrahim Bakari Hassan is a specialist in econometrics and international finance. He holds a BSc degree in Economics from Bayero University Kano Nigeria, an MSc degree in Economics from ABU Zaria Nigeria and a PhD in Economics from Universiti Putra Malaysia. He is currently serving as a lecturer and head of the department of economics at the School of Management and Information Technology, Modibbo Adama University of Technology Yola, Adamawa State Nigeria. He has been into research for quite some time and published lot of articles and book chapters in reputable journals.