European Integration and the Feldstein-Horioka Puzzle

We apply the differences-in-differences method to study the effect of the European single market in 1993 and the euro in 1999 on the Feldstein-Horioka equation where countries outside the single market serve as a control group and those within as a treatment group. We find structural breaks that coincide with both events, in addition to the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, the pattern of capital flows within the single market leaves a significant part of the flows unexplained by fundamentals.