Capital Mobility in the Enlarged Europe: A New Look at the Feldstein-Horioka Puzzle using a Quantile Regression Approach

This study assesses the degree of financial integration in the Enlarged Europe (EU-24), as well as in two sub-groups [Old Member States (EU-141 and New Member States (NMS-10)] separately by using the Feldstein-Horioka [1980] approach, i.e., by analysing the relationship between domestic saving and investment. Our results, obtained by the quantile regression method for panel data models, are consistent with a relatively high level of capital mobility in the EU-24. They also indicate that the higher ratios of domestic investment to GDP (I/GDP) in the EU-24 are less restricted by domestic saving IS/GDP), while the two ratios (I/GDP and S/GDP) are more closely related in countries with low investment rates. Our main findings are also confirmed by the results of the Granger causality test, which we undertook to ascertain if domestic saving plays an active role in financing investment in the Enlarged EU. According to our results, the Granger causality is running in both directions between saving and investment in the EU-24 and for some countries no evidence of Granger causality between saving and investment has been detected.