Working Paper: NBER ID: w4851
Authors: Martin Feldstein
Abstract: Although capital is now generally free to move across national borders, there is strong evidence that savings tend to remain and to be invested in the country where the saving takes place. The current paper examines the apparent conflict between the potential mobility of capital and the observed de facto segmentation of the global capital market. The key to reconciling this 'Feldstein-Horioka paradox' is that, although capital is free to move, its owners, and especially the agents who are responsible for institutional investments, prefer to keep funds close to home because of a combination of risk aversion, ignorance and a desire to show prudence in their investing behavior. The paper presents evidence on the capital mobility and on capital market segmentation. The role of hedging and the difference between gross and net capital movements for individual investors and borrowers are discussed. The special place of foreign direct investment is also considered. The segmentation of the global capital market affects the impact of capital income taxes and subsidies. This is discussed in the final section of the paper
Keywords: Capital Mobility; International Finance; Tax Policy; Savings; Investment
JEL Codes: F21; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investors' preferences (G11) | capital mobility (F20) |
| outbound FDI (F23) | national saving rates (D14) |
| high domestic saving rates (D14) | high domestic investment rates (F21) |
| low domestic saving rates (D14) | low domestic investment rates (F21) |
| domestic savings retention coefficient (D14) | retained domestic savings (D14) |
| decline in domestic savings retention (D14) | decline in investment rates (F21) |