The Feldstein-Horioka Puzzle and Spurious Ratio Correlation

  title={The Feldstein-Horioka Puzzle and Spurious Ratio Correlation},
  author={Kam Hon Chu},
This study shows that the Feldstein-Horioka puzzle resembles a spurious ratio correlation due to a common deflator (Pearson 1896/7). Empirically, the Feldstein-Horioka specification and its counterpart with an arbitrary deflator – final domestic demand – give similar results. Monte Carlo results also indicates that the slope β and R2 of the ratio regression are upward biased. Theoretically, assuming each of the original undeflated variables are linear homogeneous functions of the deflator and… CONTINUE READING


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