Abstract:
The Feldstein–Horioka (FH) puzzle, that is the strong correlation between saving and
investment in a world where obstacles to capital mobility are limited, has been studied
extensively since it was exposed in 1980. Even though the theoretical and empirical literature
has examined many of its potential causes, the puzzle persists. This paper aims
at shedding further light on the issue by investigating the relationship between saving
and investment in South Africa since 1946 using fractional integration and cointegration
techniques to account for high persistence in the series. We find evidence of fractional
cointegration between saving and investment, indicating some degree of persistence in
the gap between the two variables.We also find a structural break in saving and investment
ratios to GDP around 1980, which roughly coincides with the start of a financial
deregulation process in South Africa. While fractional cointegration holds before the
break, it does not thereafter. In other words, while the FH puzzle is observed before the
start of financial deregulation, it subsequently disappears. This suggests that financial
deregulation may have loosened the link between saving and investment.
