Testing for the Feldstein-Horioka hypothesis in Asia using wavelet analysis

ABSTRACT

We investigate the Feldstein-Horioka (1980) puzzle using a novel time-frequency approach. The wavelet-based retention and correlation coefficients are estimated for a cross-section of 15 Asian countries over the period 1972–2016. The countries are grouped as OCED countries (Japan and South Korea), least developed countries (like Bangladesh and Nepal), the large countries (like India and China), and the small countries (like Sri Lanka and Pakistan). Our approach reveals some interesting insights on the relationship between investment and saving rates and investment and current account deficits.

KEYWORDS:

• Feldstein-Horioka puzzle
• retention coefficient
• time-frequency space

JEL CLASSIFICATION:

• F21
• F32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The puzzle was first documented by Martin Feldstein and Charles Harioka in 1980 and is considered as one of the major six puzzles in macroeconomics.

² For an excellent literature review, please refer to Tesar (1991).

³ For all the estimations MATLAB 2017b has been used.