THE FELDSTEIN-HORIOKA PUZZLE AND EXCHANGE-RATE REGIMES - EVIDENCE FROM COINTEGRATION TESTS

Many economists specialized in international finance claim that intern ational capital markets are highly integrated (at least during the fle xible exchange rate era). The main consequence of the above claim is t hat there is no longer any close relationship between investment and s avings decisions. In other words, the close link between savings and i nvestment ceases to exist under perfect capital mobility. Therefore, w e construct a general equilibrium optimization model that is capable o f generating artificial (model) data for savings and investment. Then, using the methodology of cointegration testing on these artificial da ta, we test whether there exists or not any link between savings and i nvestment. The test is implemented between two different exchange rate regimes, that is, that of the Bretton Woods and that of the floating or flexible exchange rate regime. The results from the empirical analy sis provide support tor integrated capital markets over the second exc hange rate era in the case of the United States of America.