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Kam Hon Chu
''The Feldstein-Horioka puzzle, the Frankel-Dooley-Mathieson puzzle, spurious ratio correlation and measurement errors''
( 2017, Vol. 37 No.3 )
This paper extends the Feldstein-Horioka regression as a spurious ratio correlation due to a common deflator (Chu 2012) by incorporating measurement errors. The results explain not only the Feldstein-Horioka puzzle but also the Frankel-Dooley-Mathieson puzzle, namely the counter-intuitive finding that the Feldstein-Horioka coefficients for LDCs are lower than their OECD counterparts. The lower coefficients or downward biases arise from LDCsʹ poorer data quality rather than higher international capital mobility. The global trend of growth in shadow economies, thus larger measurement errors, is also a factor contributing to the decline in the Feldstein-Horioka coefficients across countries over time.
Keywords: Feldstein-Horioka Puzzle, Frankel-Dooley-Mathieson Puzzle, International Capital Mobility, Investment-Saving Correlation, Measurement Errors, Spurious Ratio Correlation
JEL: E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
F3 - International Finance: General
Manuscript Received : Dec 21 2016 Manuscript Accepted : Aug 31 2017

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