Work

Saving and investment causality: implications for financial integration in transition countries of Eastern Europe

Year: 2017

Type: article

Abstract: Numerous studies have been devoted to the Feldstein-Horioka puzzle. However, no consensus has been reached in the literature. This paper examines the causal relationship between domestic saving and investment rates in six transition economies (Estonia, Latvia, Lithuania, Ukraine, Belarus, and Russian Federation). Theoretically, the presence of any type of causal structure between these two series in a country implies that national capital markets are not open; hence capital flows are impeded. Therefore, the paper employs the bootstrap panel Granger causality approach that accounts for both cross-sectional dependence and slope heterogeneity across countries to determine the causal structure. The findings show that there is a causality between the series, thereby implying that capital is not perfectly mobile internationally in any of the countries under review, but it is more mobile in Estonia, Russian Federation, and Latvia than Lithuania, Belarus, and Ukraine. The underdevelopment of financial markets in these countries as well as the demand for foreign capital to finance domestic investment projects and the lack of adequate economic and financial reforms might have driven these results.

Source: International Economics and Economic Policy

DOI: 10.1007/s10368-017-0390-6

Author: Manuchehr Irandoust

Institution: Kristianstad University

Language: English

Topic: Global Financial Crisis and Policies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Partnerships for the goals, Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,190