Can Financial Frictions Account for the Cross-Section Feldstein-Horioka Puzzle?
dc.contributor.author | Bai, Yan | |
dc.contributor.author | Zhang, Jing | |
dc.date | 2005-10 | |
dc.date.accessioned | 2006-04-06T15:56:43Z | |
dc.date.available | 2006-04-06T15:56:43Z | |
dc.date.issued | 2006-04-06T15:56:43Z | |
dc.identifier.uri | https://hdl.handle.net/2027.42/21614 | |
dc.description.abstract | This paper studies the famous Feldstein and Horioka finding, which is a high correla-tion between long period averages of savings rates and investment rates across countries. We first confirm the Feldstein-Horioka finding with a more recent data set, and then show that a calibrated complete markets model generates a cross-section savings-investment correlation close to zero. Thus, the cross-section Feldstein-Horioka finding is a puzzle to the complete markets model and further research is needed to account for this puzzle. We next explore roles of financial frictions in accounting for the cross-section Feld-stein-Horioka puzzle. The most popular incomplete markets model, the bond model with natural borrowing constraints, cannot account for the cross-section Feldstein-Horioka puzzle. We then propose the bond model with enforcement constraints in which uncon-tingent debt contracts are enforced by the threat of permanent exclusion from the mar-kets. This model generates endogenous borrowing constraints, which capture the incen-tives of countries to repay their debts instead of their abilities to repay under natural bor-rowing constraints, and accounts for the cross-section Feldstein-Horioka puzzle. | en |
dc.format.extent | 4489897 bytes | |
dc.format.mimetype | application/pdf | |
dc.language.iso | en_US | en |
dc.relation.ispartofseries | 005 | en |
dc.subject | Feldstein and Horioka, Financial Frictions, International Finance | en |
dc.subject.other | F30 | en |
dc.title | Can Financial Frictions Account for the Cross-Section Feldstein-Horioka Puzzle? | en |
dc.type | Working Paper | en_US |
dc.subject.hlbtoplevel | Social Sciences | |
dc.contributor.affiliationum | International Policy Center (IPC); Gerald R. Ford School of Public Policy | en |
dc.contributor.affiliationum | Department of Economics | en |
dc.contributor.affiliationother | Department of Economics, Arizona State University | |
dc.contributor.affiliationumcampus | Ann Arbor | |
dc.description.bitstreamurl | http://deepblue.lib.umich.edu/bitstream/2027.42/21614/1/IPC-working-paper-005-ZhangBai.pdf | en_US |
dc.owningcollname | International Policy Center (IPC) - Working Paper Series |
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