ABSTRACT
Two decades ago, Feldstein and Horioka (1980) proposed a study of the savinginvestment nexus that initiated a major controversy on the extent and implications of international finance. They found high correlation between savings and investments in OECD countries (including the US and Japan), which apparently implied a low degree of global capital mobility. Surprisingly, the disputable findings were confirmed by many other subsequent studies.1 Such event challenges the conventional wisdom which characterises the post-Bretton Woods floating-rate era as one that is experiencing a seeming increase in capital mobility (Obstfeld and Taylor, 2001), following the abandonment of fixed exchange rate regimes and the removal of capital controls since 1970s. In addition, the accelerated pace of globalisation and financial market deregulations as well as the revolutionary changes in information and communication technologies have further demonstrated an increasingly integrated world economy. Capital and trade flows expand remarkably and economic growth began its most rapid spurt in history worldwide. In other words, the Feldstein-Horioka criterion (FHC hereafter) contradicts the fact that capital movements across countries are getting mobile, as the global capital market has become more integrated and thus creating a puzzle2 in modem economics.
