||The Solution to the Feldstein-Horioka Puzzle
Ford, NicholasHorioka, Charles Yuji
Institute of Social and Economic Research Discussion Papers
23 , 2017-11 , The Institute of Social and Economic Research, Osaka University
The purpose of this paper is to set out a surprisingly simple solution to the Feldstein-Horioka Puzzle or Paradox, which is that even though global financial markets appear to be integrated, levels of saving and investment are correlated across countries because financial markets cannot, by themselves, achieve net transfers of financial capital. This is because net transfers of financial capital require the integration not only of financial markets but also of goods markets and because there are substantial frictions in goods markets (e.g., transport, marketing, and distribution costs, technical standards, certification procedures, tariffs and nontariff barriers, etc.).