Capital Mobility and Feldstein Horioka Puzzle in India

This Study attempts to investigate the degree of capital mobility for Indian economy using the Investment ? saving Quantitative approach proposed by Feldstein and Horioka in 1980. They hypothesized that low degree of correlation between domestic savings and investment is a measure of higher capital mobility as latter makes international capital pool available for domestic investment. However, the empirical results of their study produced results contrary to their own hypothesis and came to be known as Feldstein- Horioka puzzle. This was followed by number of studies some of which tried to explain the puzzle where others doubted the saving investment criteria as a measure of capital mobility. This study, using data of Indian economy tries to investigate whether Feldstein-Horioka Puzzle is supported by saving investment behaviour in India or their proposed criteria for capital mobility suits well to the Indian economy, as far as measurement of capital mobility is considered. Using Engel-Granger Cointegration analysis long term equilibrium relationship was found and validity of saving investment criterion was established.