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European Integration and the Feldstein–Horioka Puzzle
Author(s) -
Katsimi Margarita,
Zoega Gylfi
Publication year - 2016
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12130
Subject(s) - economics , investment (military) , monetary economics , financial integration , financial crisis , capital (architecture) , financial market , capital flows , econometrics , macroeconomics , finance , market economy , history , liberalization , archaeology , politics , political science , law
We apply the differences‐in‐differences method to study the effect of the European single market in 1993 and the euro in 1999 on the Feldstein–Horioka equation where countries outside the single market serve as a control group and those within as a treatment group. We find structural breaks that coincide with both events, in addition to the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, the pattern of capital flows within the single market leaves a significant part of the flows unexplained by fundamentals.