Time-varying saving-investment relationship and the Feldstein-Horioka puzzle

Numerous studies have been devoted to the Feldstein-Horioka puzzle. However, no consensus has been reached in the literature. This paper examines the dynamic saving-investment relationship by using a time varying cointegration model. The saving-retention coefficients are found to be high for developed economies, but low for less developed economies, which could be explained by the difference of the long-run solvency constraint between developed and less developed economies. While more evidence is found for time-varying cointegration using quarterly data, the magnitudes of saving retention coefficients have no substantial difference from those of annual data.