Financial Integration in south Asia : An Application of Feldstein Horioka Puzzle

University essay from Södertörns högskola/Institutionen för samhällsvetenskaper

Author: Salman Riaz; [2011]

Keywords: ;

Abstract:

In this thesis, panel data is used to investigate the degree of financial integration of selected South Asian countries from 1981 to 2009 using the Feldstein–Horioka (1980) approach.

International macroeconomics is considered to be the economics of puzzles. There has been a range of 5 to 15 puzzles so far categorized in international macroeconomics. Feldstein Horioka is the most significant puzzle which looks into the savings and investment relationship and the issue of capital mobility. This study estimates Feldstein–Horioka equations by using the panel unit root and panel cointegration techniques. Investment and savings rates are found to be non stationary at level while stationary at first difference and to be cointegrated in panels.

In case of perfect capital mobility, people should be able to invest in those countries where the rates of returns are higher resulting in no relationship between domestic savings and investment. So the long run relationship between domestic savings and investments interpreted as an indicator of capital immobility and segmented capital markets in South Asian Countries. The findings of the study indicates that the Feldstein-Horioka puzzle remains a puzzle for South Asian countries and the vigorous result of positive saving–investment correlations has continued the debate on the subject of the degree of financial integration.

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