Extract
Current account dynamics and the Feldstein and Horioka puzzle: the case of Greece.
1. Introduction
International capital mobility has been the subject of extensive empirical and theoretical research for academic and economic policy reasons. Academically, the issue is of interest for the empirical validity of the assumption of perfect capital mobility--despite its importance to many open-economy macroeconomic and financial models--is still a moot point. Economic policy makers are also concerned with the degree of capital mobility. A country's ability to smooth its time profile of national consumption, the efficacy of fiscal, monetary and current account policies and the choice between targeting national savings or domestic capital formation are all affected by the degree to which a country is linked to international capital markets. In their well known paper, Feldstein and Horioka (1980) used the correlation between national savings and domestic investment as an indicator of international capital mobility. They interpreted high (low) correlation values as evidence of low (high) capital mobility. Their argument is the following. In a closed economy, savings remains necessarily home and finances domestic investment; an increase in domestic investm...See the full content of this document
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