Istituto di Economia Internazionale - The Feldstein-Horioka Puzzle and the Global Financial Crisis: Evidence from South Africa using Asymmetric Cointegration Analysis

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Corresponding Author:
Andrew Phiri, Department of Economics, Faculty of Business and Economic Studies, Nelson Mandela University, Port Elizabeth, South Africa

The Feldstein-Horioka Puzzle and the Global Financial Crisis: Evidence from South Africa using Asymmetric Cointegration Analysis

Volume 72 - Issue 2, May 2019
(pp. 139-170)
JEL classification: C22, C52, F21, F41
Keywords: Investment, Savings, Feldstein-Horioka Puzzle, Threshold Cointegration, Threshold Error Correction Model, Sub-Saharan Africa, South Africa

Abstract

In this study we examine the effects of the 2007-2008 global financial crisis on the Feldstein-Horioka coefficient for South Africa using momentum threshold cointegration and error correction techniques applied to quarterly national savings-investment time series collected between 1960:Q1 and 2017:Q1. Our empirical strategy consists of segregating the data into three samples; one corresponding to the full sample (1960:Q1 – 2016:Q4), another corresponding to the pre-crisis period (1960:Q1-2008:Q3) and the last corresponding to the post-crisis period (2008:Q4-2016:Q4). Our empirical results validate asymmetric cointegration effects for both the full and the pre-crisis periods while only accepting a linear cointegration relation for the post-crisis period. The saving-retention coefficient estimates produced are 0.59 (significant), 0.64 (significant), and 0.22 (insignificant) for the full, pre-crisis and post-crisis periods, respectively. These results imply that international capital mobility has increased in the post-crisis period and this may be primarily due to the effects of a redirection of private capital flows by investors to safe haven assets. Therefore policy plans of further relaxing capital controls is inadvisable considering that capital is already highly mobile.

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The Feldstein-Horioka Puzzle and the Global Financial Crisis: Evidence from South Africa using Asymmetric Cointegration Analysis

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