The Feldstein-Horioka Paradox – Evidence for Colombia during 1925-2011

Abstract

This paper examines the relationship between national investment and saving in Colombia during the period 1925-2011. Consistent with Cardenas and Escobar (1998), an Error Correction Model is used to examine short and long run effects. The results provide evidence that investment and saving are co-integrated during the study period. The results for the co-integration vector, with and without structural breaks, indicate that capital mobility was low, which is consistent with the Feldstein – Horioka [1980] paradox. The results imply that increases in domestic saving rates reduce the mobility of financial capital in Colombia.

Keywords

• Feldstein – Horioka puzzle
• cointegration
• Error Correction Model
• imperfect capital mobility
• Colombia