The Validity Of Feldstein-Horioka Hypothesis For Turkish Economy: Cointegration And Markov Regime Switching Approach

Abstract

This study examines the Feldstein-Horioka hypothesis for Turkish Economy by using several time series techniques. Feldstein and Horioka (1980) have built and estimated a basic equation that shows the relationship between domestic savings and domestic investments to investigate whether domestic savings are retained for domestic investment or flows to international capital mobility. In the present study, this hypothesis has been tested for the period 1962-2015 of Turkish Economy. To be able to observe the periodical changes and breakpoints, the analysis contains different sub periods and estimation methods. Our findings show that while a very strong relationship has been observed between domestic savings and domestic investments for the period 1962-1990; after 1990, a lower coefficient has been estimated. Moreover, the period 1990-2015 has been also estimated via the Markov Regime Switching Model. The evidences obtained from this model show that pre and post 2001 periods give different results. It is observed that the international capital mobility of Turkish Economy has risen in the post 2001 period as against the previous years. Within the context of the Feldstein-Horioka hypothesis, all the obtained evidences reveal that the tendency for international capital mobility of Turkish Economy increases in time.