The "Real" Explanation of the Feldstein-Horioka Puzzle
This paper shows that global capital markets cannot, by themselves, achieve net transfers of financial capital between countries and that both the integration of global financial markets as well as the integration of global goods markets are needed to achieve net transfers of capital between countries. Frictions (barriers to mobility) in one or both of these markets can impede net transfers of capital between countries, produce the Feldstein and Horioka (1980) results, and prevent real interest rates from being equalized across countries. Moreover, there is empirical evidence that barriers to the mobility of goods and services are an important obstacle to international capital mobility.
The authors are indebted to Chris Dillow and Graeme Roy for their valuable advice and comments. This work was supported by JSPS (Japan Society for the Promotion of Science) KAKENHI Grant Number 15H01950, an Asian Growth Research Institute project grant, and a grant from the MEXT Joint Usage/Research Center for Behavioral Economics, Institute of Social and Economic Research, Osaka University. Any remaining errors are the authors’. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Nicholas Ford & Charles Yuji Horioka, 2017. "The ‘real’ explanation of the Feldstein–Horioka puzzle," Applied Economics Letters, vol 24(2), pages 95-97. citation courtesy of