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The Feldstein–Horioka Puzzle, a Global Glut of Savings, and Omitted Variable Bias: 1970–2023

by Jonathan E. Leightner and Anjali Sinha

J. Risk Financ. Manag. 2025, 18(12), 676; https://doi.org/10.3390/jrfm18120676 - 27 Nov 2025

Cited by 1 | Viewed by 936

Feldstein and Horioka in 1980 estimated (I/GDP)_i = α + β(S/GDP)_i where “i” is for a given country over time, “I” is domestic investment, and “S” is domestic savings. Feldstein and Horioka found βs that were insignificantly different from one and significantly different from zero. According to Feldstein and Horioka, these results conflict with an assumption of perfect capital mobility because, if capital were perfectly mobile, then β should be zero. We estimated (I/GDP)_it = α + β(S/GDP)_it using data from 22 countries from 1970 to 2023, where i denotes the country and t denotes the year. We found βs to be significantly less than 1 but greater than 0. We then used Reiterative Truncated Projected Least Squares, which was designed to solve the omitted variable problem (and helps a researcher visualize the effects of heteroscedasticity), to estimate a β_it for every observation. We find that β_it decreases for countries that export capital and increases for countries that import capital. We argue that the Feldstein-Horioka “puzzle” is based on a confusion—when the effect of both exporting and importing capital is considered, β should equal approximately one. Feldstein and Horioka focus on single countries, but when pairs of savings exporters and importers are considered, their “puzzle” disappears. However, the fact that β_it is now much less than 1 and falling over time suggests that a global glut of savings is worsening. Full article

(This article belongs to the Special Issue Advanced Studies in Empirical Macroeconomics and Finance)

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13 pages, 852 KB

Open AccessArticle

Using Variable Slope Total Derivative Estimations to Pick between and Improve Macro Models

by Jonathan Leightner

J. Risk Financ. Manag. 2022, 15(6), 267; https://doi.org/10.3390/jrfm15060267 - 14 Jun 2022

Cited by 2 | Viewed by 2656

Abstract

Using the same data set, a researcher can obtain very different reduced form estimates just by assuming different macroeconomic models. Reiterative Truncated Projected Least Squares (RTPLS) or Variable Slope Generalized Least Squares (VSGLS) can be used to estimate total derivatives that are not model dependent. These estimates can be used to pick between competing macro models, improve current models, or create new models. A selected survey of RTPLS estimates in the literature reveals several common patterns: (1) as income inequality has surged around the world, the effect of changes in government spending (G), exports (X), and money supply (M-1) on Gross Domestic Product (GDP) have plummeted, (2) decreases in G, X, and M-1 cause GDP to fall more than equal increases in G, X, and M-1 cause GDP to rise, and (3) unusually large increases in G and M-1 cause their effect on GDP to plummet. These common patterns fit with a global glut of savings hypothesis, which predicts that an increase in savings will not cause an increase in production expanding investment. An appropriate model could be built around the idea that investors have a choice between investing to increase production or investing to earn rent or interest. Full article

(This article belongs to the Special Issue Macroeconomic Modelling)

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16 pages, 394 KB

Open AccessArticle

The Changing Effectiveness of Monetary Policy

by Jonathan E. Leightner

Economies 2013, 1(3), 49-64; https://doi.org/10.3390/economies1030049 - 13 Nov 2013

Cited by 1 | Viewed by 7621

Abstract

In the wake of the 2008 financial crisis, many countries are hoping that massive increases in their money supplies will revive their economies. Evaluating the effectiveness of this strategy using traditional statistical methods would require the construction of an extremely complex economic model of the world that showed how each country’s situation affected all other countries. No matter how complex that model was, it would always be subject to the criticism that it had omitted important variables. Omitting important variables from traditional statistical methods ruins all estimates and statistics. This paper uses a relatively new statistical method that solves the omitted variables problem. This technique produces a separate slope estimate for each observation which makes it possible to see how the estimated relationship has changed over time due to omitted variables. I find that the effectiveness of monetary policy has fallen between the first quarter of 2003 and the fourth quarter of 2012 by 14%, 36%, 38%, 32%, 29% and 69% for Japan, the UK, the USA, the Euro area, Brazil, and the Russian Federation respectively. I hypothesize that monetary policy is suffering from diminishing returns because it cannot address the fundamental problem with the world’s economy today; that problem is a global glut of savings that is either sitting idle or funding speculative bubbles. Full article

(This article belongs to the Special Issue Effects of Fiscal and Monetary Policy in the Great Recession)

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