The Impact of the Euro on Domestic Saving and International Capital Flows

This paper examines the impact of the euro common currency on the saving-investment relationship (known as Feldstein-Horioka puzzle) for a panel of 12 European Union countries. The findings for Pedroni (2004) and Westerlund (2007) panel cointegration estimates exhibit mix results over the entire sample period (1970-2012). However, the findings for the post-euro period (2002-2012) are insignificant. The Fully-modified Ordinary Least Square (FMOLS) post-euro period estimates for the saving-retention coefficient suggests that capital mobility has further increased since 2002. Moreover, the results show a declining trend of savings retention which validates the argument that the saving-investment correlation is more useful for explaining intranational capital mobility and current account dynamics.