Can Financial Frictions Account for the Cross-Section Feldstein-Horioka Puzzle?

  title={Can Financial Frictions Account for the Cross-Section Feldstein-Horioka Puzzle?},
  author={Yan Bai and Jing Zhang},
This paper studies the famous Feldstein and Horioka finding, which is a high correlation between long period averages of savings rates and investment rates across countries. We first confirm the Feldstein-Horioka finding with a more recent data set, and then show that a calibrated complete markets model generates a cross-section savingsinvestment correlation close to zero. Thus, the cross-section Feldstein-Horioka finding is a puzzle to the complete markets model and further research is needed… CONTINUE READING
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