Nicholas Ford, Charles Yuji Horioka, 05 May 2016

The Feldstein-Horioka puzzle concerns why levels of investment and saving are correlated across countries. This is puzzling because financial markets can rapidly move capital between countries, and there is no reason why the best investment opportunities should be in a saver’s home country. This column posits a disarmingly simple solution to this longstanding puzzle – global capital markets cannot by themselves achieve net capital transfers between countries. This solution may have implications for related issues such as the interaction of interest rates, exchange rates, and current account imbalances.

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