Does the Feldstein-Horioka puzzle exist among South Asian countries? A regime-switching approach

A plethora of literature has been undertaken to study the validity of the Feldstein-Horioka (FH) puzzle. However, divergent views continue to persist in the FH puzzle literature. This study explores the empirical validity of the FH puzzle in the case of South Asian countries using annual data from 1960 to 2017. Both panel data approach and Markov-switching regression approach are used to empirically analyze the FH puzzle. The results of the cointegration test confirm the long-run relationships between saving and investment in the selected South Asian countries. The results of Markov-switching regression confirm that the saving-retention coefficient has shifted from high to low values and also from low to high values. Thus, the FH puzzle exists for a particular time period and mostly depends on the regime shifts in the South Asian countries. The results of panel fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) methods also confirm that FH puzzle holds for the South Asian countries. Therefore, the study suggests that any saving promotion policies are desirable for enhancing investment among the South Asian regions.