CURRENT ACCOUNT SOLVENCY AND THE FELDSTEIN-HORIOKA PUZZLE

In this paper we suggest an alternative explanation of the high cross- section association between shares of saving and investment in GDP whi ch Feldstein and Horioka (1980) interpret as evidence of low capital m obility. In OECD countries, saving and investment shares appear to be I(1). We show that a solvency constraint implies that the current bala nce is stationary and thus that saving and investment cointegrate with a unit coefficient irrespective of the degree of capital mobility. It is this long-run relation that the FH cross-section regression captur es. Econometric results for 23 OECD countries over the 1960-92 period are consistent with this explanation.