The Feldstein-Horioka puzzle for the Next Eleven countries: A panel data analysis with Fourier functions

Abstract

The main objective of this paper is to empirically investigate the Feldstein-Horioka puzzle for the Next Eleven (N-11), which are Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam, employing using panel data techniques that allow structural breaks through Fourier functions. We also introduce a new panel causality test to the literature that allows structural changes via Fourier functions. In the empirical section of the study, we first test the stationarity of gross domestic savings and gross capital formation levels of N-11 countries over 1990-2017 using the Fourier CIPS Test and find that the series are non-stationary. Following this, we examine the long-run relationship between the variables using the panel Fourier cointegration test. Having found a cointegration between the variables, we estimate the long-run coefficients employing the panel Augmented Mean Group. Finally, we analyze the causality relationship between the variables by using a panel Fourier causality test. Our findings support the evidence of the validity of the Feldstein-Horioka puzzle in the N-11 countries.