ERC WORKING PAPERS
00/3 Policy regime change and the Feldstein-Horioka puzzle: The UK evidence
This study investigates whether the Feldstein and Horioka (1980) argument on
the domestic saving-investment relationship may remain as a "puzzle"
when an endogenous structural break corresponding to a major policy regime change
is taken into account. To this end, we employ not only the conventional procedures
developed for a data generation process without a break, but also some recent
methods which allow stationarity around an endogenous break under the alternative
hypothesis. The evidence based on the UK annual data from 1948 to 1998 suggests
that the long-run relationship between saving and investment disappears after
the estimated endogenous structural break point coinciding with the abolition
of foreign exchange controls in 1979.