Feldstein-Horioka Puzzle in South Asia and KSA

Abstract: The Feldstein-Horioka puzzle (1980) poses the question that why saving and investment are linked across countries. This is perplexing as it is normally considered that financial markets are frictionless and can quickly transfer capital between economies, and there is no reason why the best investment opportunities should be in a saver’s home country. This study tests the Feldstein and Horioka hypothesis (1980) for four South Asian developing economies and an oil producing economy, Saudi Arabia. Performing cointegration tests on annual data, the results indicate that approximately one to one long run relationship between investment and saving is present in India and Saudi Arabia thus validating the above hypothesis while a weak form relation for Bangladesh, Pakistan, and Sri Lanka shows the existence of Feldstein and Horioka puzzle