Saving and Investment Puzzle in Thailand Author: Warawut Ruankham Co authors: Sandar Htwe , Su Hlaing Oo , and Htet Zaw Linn International Conference on “Opportunity in Adversity The New Global Success Mantra” 30 March 2021

1. Saving and Investment Puzzle in Thailand
Author: Warawut Ruankham
Co-authors: Sandar Htwe, Su Hlaing Oo, and Htet Zaw Linn
International Conference on “Opportunity in Adversity – The New Global Success Mantra”
30 March 2021
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2. Content of Presentation
• Introduction
• Objective of study
• Conceptual Framework
• Data and Methodology and Model Construction
• Empirical Results
• Conclusion
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3. Introduction
• In standard economics literature, rational investors would invest amount of access saving in
country offering higher interest return per unit of investment.
• With low level of international financial market regulation, capital mobility will adjust the rate of
return until they are equal (Obstfeld et al. (2000).
• Therefore, the savings (S) of any country would flow to countries with the most productive
investment opportunities. This implies that the relationship between domestic saving (S) and
investment (I) should be independent.
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4. Introduction
• However, there are multiple empirical evidences supported that relationship between economic
variables might not get in line with the standard economic theory.
• This phenomenon was widely known as a “puzzle”.
• Obstfeld et al. (2000) found that there are still “many puzzles” existing in economic literature,
particularly in international macroeconomics and finance
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5. S-I puzzle (Feldstein and Horioka,1980)
• Feldstein-Horioka (F-H) or Saving and Investment (S-I) puzzle is one of them.
• S-I is a widely discussed problems in macroeconomics and international finance.
• This puzzle was initially proposed by Feldstein and Horioka (1980).
• They argued that if the assumption between saving and investment (S-I) is true and there is
perfect capital mobility, we should observe correlation between domestic investment and
savings.
• The results from their study found strong correlation of saving and investment in some
developed countries during 1960-74. (i.e., Australia, UK, Germany)
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6. Reasons behind the Feldstein-Horioka puzzle
(Feldstein and Horioka,1980)
• They explained that there were five rationales behind the particular strong correlation.
• Firstly, it is because the domestic tax regime discourages investor to invest abroad. This tax regime
discounts the return of investment.
• Second, cost of transaction, fees, custody, or dealing costs in different countries are volatile. This
discourages investors to invest in other countries rather than their home country where these costs are
calculable.
• Third, investment in abroad encounters the exchange rate risk, particularly when withdraw the money
back to home country.
• Fourth, the information asymmetric problems might arise when investing abroad. There might be
advantages over the foreign investors in terms of the information acquisition.
• Lastly, investors could face with unanticipated regulatory risks from foreign countries government.
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7. Introduction
• Empirically, several evidences found the existence of the contradiction between standard
international macroeconomics and real-world situation.
• Theses puzzle have long been studied and explainable in most of the industrial countries.
• The nexus between domestic saving and investment (S-I) under Feldstein and Horioka
puzzle were widely tested by a wide range of studies (e.g., Martin and Charles (1980); Schott
1981; Monroe 1929; Byrne et al 2009; Sinha and Sinha 1998; Cavallo and Pedemonte 2016;
Khundrakpam and Ranjan 2010; Baxter and Crucini 1993; Nasir et al. 2004).
• Most studies employed classical model (Granger cointegration). Only few studies employed
modern method.
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8. Introduction
• Most studies aimed at advancing economy and industrial countries. There are only a few
that aimed at small developing economies liked Asian, Africa and developing Latin American
(Narayan 2005).
• However, during the period of 2005-2010, there begins to have studies tested the validity of
such theoretical framework in less developing countries such as Jiranyakul and Brahmasrene
(2008); Narayan (2005); and Nural et al. (2014).
• This study, therefore, aim to provide an additional empirical evidence to test the existence of
F-H puzzle (cointegration between S-I) in Thailand based on more modern method.
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9. Objective of Study
• To provide an additional empirical evidence to support the absence of F-H puzzle (cointegration
between S-I) in Thailand.
• To diagnose the long run cointregation between domestic saving and investment in Thailand
during 1980-2020 based on ARDL-Bound Testing
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10. Thailand Domestic Saving and Investment
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11. Conceptual Framework
Feldstein-Horioka
(F-H) Puzzle
Correlation between national saving and
investment (S-I) should be dependent
Yes
Capital immobility
F-H is still Exist
No
F-H No longer
Exist
Capital mobility
Error Correction Model (ECM)
Engle and Granger (1987)
cointegration test
Pesaran et al. (2001) ARDL
Bound Testing for
cointegration
Unit Root Test: Augmented Dickey Fuller (ADF) and Phillips-
Perron (PP) test
Stability Test: the cumulative sum (CUSUM) and cumulative
sum square (CUSUMSQ)
Yes
No
Yes
No
Model
construction
Data
Collection
Data
Diagnosis
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12. Model Construction
This study adopted the model setup by Obstfeld et al. (2000), Pesaran et al. (2001) and Jiranyakul and
Brahmasrene (2008). The model construction is explained by following stages.
• First, we indicate the nexus between S-I. According to Feldstein-Horioka regression, the relation of
S-I is expressed as cross-section regressions:
𝐼
𝑌 𝑡
= 𝑎0 + 𝑎1
𝑁𝑆
𝑌 𝑡
+ 𝜀𝑡 (1)
• Where I/Y is the domestic private investment as a fraction of GDP, NS is the domestic saving as a
fration of GDP
• Note: Engle and Granger (1987) strictly required that all variables must be integrated of order one
or I(1) and must be known before performing the test
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13. Model Construction
• Later on, Pesaran et al. (2001) proposed a new method for testing cointegration that require
more relaxed assumption of level of integration
• The approach is basically based on conditional autoregressive distributed lag (ARDL) and
error correction mechanism (ECM).
• The benefit of ARDL is that it allows to examine cointegration relationships amongst
variables regardless of their order of integration, I(0), I(1) or a mixture of both.
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14. Model Construction
• In second stage, we indicate the model specification based on the ARDL instead of Engle and
Granger (1987). The model was specified as:
∆
𝐼
𝑌 𝑡
= 𝛼0 + σ𝑖=1
𝑝
𝛽𝑡∆
𝐼
𝑌 𝑡−1
+ σ𝑖=1
𝑞
𝛾𝑡∆
𝑁𝑆
𝑌 𝑡−𝑗
+ 𝜆∆
𝑁𝑆
𝑌 𝑡
+ 𝜀𝑡 (2)
• the expression (3) provides autoregressive part (lag of endogenous variables) and the
distributed lag (lags of exogenous variables) by adding the lagged level variables into equation
(2). The α,β,γ are the parameters of short run variables and λ was the parameter of the long
run variables. The study then obtained the F-statistic by estimating equation (3) for Thailand as
following equation;
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15. Model Construction
distributed lag (lags of
exogenous variables)
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16. Hypothesis of Cointegration
• The last stage, we compared the computation of F-statistic from (3) with the critical bound
values obtained from the Narayan (2005) case III unrestricted intercept and no trend which is fit
better for small number of observations.
• To find integration, the study performed the hypotheses test as below Table 2.
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17. Empirical Results
To find cointegration of
domestic saving and
investment using ARDL
bound test, this study first
tested the unit root under
the Augmented Dickey
Fuller (ADF) and Phillips-
Perron (PP) test. For
Thailand, resulted from
ADF and PP test, shown
in Table 3
a) The number in [square brackets] is the optimal lag length determined by Schwartz information criterion (SIC) with maximum lag of 9
b) The number in {curly brackets} is the optimal bandwidth determined by the Newly-West using Bartlett Kernel
c) The number in (parentheses) is the p-value provided by MacKinnon (1996).
d) *, **, and *** denotes 10, 5, and 1 percent significance level, respectively.
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18. ARDL-ECM Cointegration Test
• The bounds testing procedure simply estimated OLS regression with the first difference of the variables in equation (2). Then,
put the lagged level variables and conduct the variable addition test. Then we computed the F-statistics and compared them
with the critical values (Narayan 2005) in the case III as the unrestricted intercept and no trend.
• The result displayed in Table 3 indicates the computed F-statistics for Thailand that equals to 2.753.
• In addition, the LM test indicated no serial correlation problem since the p-value of χ^2 (2) was greater than 0.05 for both
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19. ARDL-ECM Cointegration Test
2.753
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20. Stability Test
In addition to unit root
test of order of
integration, the study
was plotted the
cumulative sum
(CUSUM) and
cumulative sum square
(CUSUMSQ) to ensure
the model, pasted the
necessary assumption
of stationary and the
structural break
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21. Conclusion
• We found strictly no correlation between domestic saving and investment (S-I)
• The F-H puzzle is not exist in Thailand
• Our results is in line with Jirayakul and Brahmasrene (2008) and Byrne and Fiess
(2009).
• Main reasons for the capital movement in Asian countries
1. Level of financial market development of each countries are not the same.
This motivates the liquidity to flow to country with higher development level.
2. Interest rate arbitrage in Asian countries allows capital mobility
3. Financial liberalization in the regions is achieved after the Asian financial
crisis in 1997
Feldstein-Horioka
(F-H) Puzzle
Correlation between national saving and
investment (S-I) should be dependent
Yes
Capital immobility
F-H is still Exist
No
F-H No longer
Exist
Capital mobility
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22. Thank You
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23. Reference
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24. Reference
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