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Business and Economics
Abstract
Although the Feldstein-Horioka (1980) puzzle has been one of the most widely discussed problems in macroeconomics literature, long-run evidence regarding the validity of the Puzzle is missing. To extend the existing literature, we revisit the Puzzle for the case of the United Kingdom (UK) using data that covers almost two centuries, 1830–2016. We analyze the data using conventional and novel econometric methods to capture the stochastic properties of the variables and ensure robustness. To this end, well-known autoregressive distributed lag (ARDL) and recently developed nonlinear ARDL and Fourier ARDL (FARDL) models are implemented. The coefficients derived from the ARDL, NARDL, and FARDL are 0.58, 0.64, and 0.56, respectively. All results show a long-term relationship between investment and savings rates in the UK. The obtained empirical results indicate that even in the long run, there is evidence for the existence of the Puzzle.
