INTERNATIONAL FINANCIAL MARKET INTEGRATION AND THE FELDSTEIN-HORIOKA PUZZLE: EVIDENCE FROM EMERGING MARKET ECONOMIES

Financial liberalization and globalization gained speed as of late 1970s with collapse of Bretton Woods system and the global integration raised considerably, especially during the past four decades. Foreign capital flows in terms of foreign direct investments and portfolio investments increased, especially in the emerging markets experiencing high growth rates, with relatively cheap, but qualified labor. This study tests the validity of the Feldstein-Horioka puzzle in 21 emerging markets during the 1994-2016 period with the panel cointegration test of Westerlund?s (2008) Durbin-Hausman panel cointegration test and the panel causality test of Dumitrescu and Hurlin (2012). The findings revealed that domestic investments were mostly financed through external capital inflows; therefore, the findings contradicted the results of Feldstein-Horioka (1980) in the sample of emerging market economies.