What is the Feldstein–Horioka puzzle in simple terms?

If money moved freely across borders, a country's savings would not need to be invested at home, yet in practice countries that save a lot also invest a lot.

Has the puzzle been solved?

Explanations include common shocks, policy responses, long-run solvency constraints and financial frictions, and the correlation has weakened in the euro area, but there is no single agreed answer.

Feldstein–Horioka Puzzle

📈 Economics By CampusDown Wiki Editorial Team Last updated October 26, 2026

The Feldstein–Horioka puzzle is the finding in international macroeconomics that, although free capital mobility implies national saving and investment rates should be nearly unrelated, the two are in fact highly correlated across countries. Martin Feldstein and Charles Horioka first reported it in 1980.

Contents

1. Discovery and basic logic
2. Competing explanations
3. Changes over time and recent research
4. FAQ
5. References

Discovery and basic logic

Using data for 16 OECD countries from 1960 to 1974, Feldstein and Horioka (1980) regressed investment rates on saving rates and obtained a coefficient of around 0.9, close to one. With perfect capital mobility, domestic saving would flow to the highest returns on the world market, so the coefficient should be near zero. They therefore interpreted the result as evidence that international capital mobility was much lower than assumed. Obstfeld and Rogoff (2000) listed it among the six major puzzles in international macroeconomics.

Competing explanations

Many economists argued that a high correlation need not indicate low capital mobility. Obstfeld (1986) and Tesar (1991) noted that common factors such as population growth or productivity shocks can move saving and investment together. Summers (1988) and Bayoumi (1990) argued that the correlation is high because governments act to avoid large current account imbalances. Frankel (1992) concluded that unless real interest parity holds, the saving–investment correlation is a poor measure of capital mobility. Coakley, Kulasi and Smith (1998) argued that a solvency constraint requiring the current account to balance in the long run is enough by itself to produce a high correlation.

Changes over time and recent research

Using a century of data from the late nineteenth century onward, Taylor (2002) reported that the saving–investment correlation was low under the gold standard, high during Bretton Woods and lower again afterward. Blanchard and Giavazzi (2002) found that after euro area integration the correlation weakened sharply in countries such as Portugal and Greece, suggesting the puzzle might be ending. Coakley, Fuertes and Spagnolo (2004) and Apergis and Tsoumas (2009) surveyed the empirical work using time-series and panel methods. Bai and Zhang (2010) showed with a model of financial frictions, in which international debt contracts are imperfectly enforced, that a high correlation can arise even when capital is free to move.

FAQ

What is the Feldstein–Horioka puzzle in simple terms?: If money moved freely across borders, a country's savings would not need to be invested at home, yet in practice countries that save a lot also invest a lot.
Has the puzzle been solved?: Explanations include common shocks, policy responses, long-run solvency constraints and financial frictions, and the correlation has weakened in the euro area, but there is no single agreed answer.

Sources reviewed: 2026-10-26

References

Feldstein, M., & Horioka, C. (1980). Domestic saving and international capital flows. Economic Journal, 90(358), 314–329.
Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? NBER Macroeconomics Annual, 15, 339–390.
Obstfeld, M. (1986). Capital mobility in the world economy: Theory and measurement. Carnegie-Rochester Conference Series on Public Policy, 24, 55–103.
Frankel, J. A. (1992). Measuring international capital mobility: A review. American Economic Review, 82(2), 197–202.
Summers, L. H. (1988). Tax policy and international competitiveness. In J. Frenkel (Ed.), International Aspects of Fiscal Policies (pp. 349–386). Chicago: University of Chicago Press.
Bayoumi, T. (1990). Saving-investment correlations: Immobile capital, government policy, or endogenous behavior? IMF Staff Papers, 37(2), 360–387.
Tesar, L. L. (1991). Savings, investment and international capital flows. Journal of International Economics, 31(1–2), 55–78.
Coakley, J., Kulasi, F., & Smith, R. (1998). The Feldstein–Horioka puzzle and capital mobility: A review. International Journal of Finance & Economics, 3(2), 169–188.
Taylor, A. M. (2002). A century of current account dynamics. Journal of International Money and Finance, 21(6), 725–748.
Blanchard, O., & Giavazzi, F. (2002). Current account deficits in the euro area: The end of the Feldstein–Horioka puzzle? Brookings Papers on Economic Activity, 2002(2), 147–209.
Coakley, J., Fuertes, A.-M., & Spagnolo, F. (2004). Is the Feldstein–Horioka puzzle history? The Manchester School, 72(5), 569–590.
Apergis, N., & Tsoumas, C. (2009). A survey of the Feldstein–Horioka puzzle: What has been done and where we stand. Research in Economics, 63(2), 64–76.
Bai, Y., & Zhang, J. (2010). Solving the Feldstein–Horioka puzzle with financial frictions. Econometrica, 78(2), 603–632.

Reports and materials that use this theory (Korean)

There are no materials dedicated to this theory yet, but you can search related reports in the CampusDown library (Korean).

Find more reports · Search '펠트슈타인-호리오카 퍼즐' on CampusDown →

Balance of Payments TheoryBalance of payments theory: the accounts (current, capital, financial), Hume's price-specie-flow mechanism, the elasticity approach with Marshall-Lerner and the J-curve, the absorption and monetary approaches, and Goschen's theory.📈 Economics Thirlwall's LawWhat Thirlwall's law is: the proposition that long-run growth is constrained by export growth divided by the income elasticity of imports, its roots in Harrod's trade multiplier and Kaldor, extensions with capital flows, evidence and Krugman's critique.📈 Economics Rational Expectations HypothesisWhat the rational expectations hypothesis is, Muth's 1961 proposal, how it differs from adaptive expectations, Lucas and Sargent–Wallace on policy ineffectiveness, efficient markets, and critiques from learning and information rigidity.📈 Economics Solow Growth ModelWhat the Solow growth model is: the Solow–Swan production function, diminishing returns to capital, the steady state, the golden rule, technical progress and the Solow residual, conditional convergence, the MRW extension, and the East Asian growth debate.📈 Economics Leontief ParadoxWhat the Leontief paradox is: the finding that capital-abundant America exported labor-intensive goods, its conflict with the Heckscher–Ohlin theorem, explanations based on skills and natural resources, Leamer's reconsideration and multicountry tests.📈 Economics

Latest ArticlesView all ›

New guides for college study and assignments (Korean)

This article was last updated on October 26, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.