An Analysis of Feldstein-Horioka Puzzle regarding Economic Openness of Bangladesh

Abstract

This paper proposes an original framework to determine the influence of economic openness (trade-GDP ratio) on the Feldstein-Horioka result of Bangladesh with a positive saving-investment association. Based on panel Threshold Regression Model, Johansen Long Run Cointegrating Equation is developed for Bangladesh over the period 1972-2015.ECM model is also developed to test the short run dynamics of investment function. CUSUM and CUSUMQ have been used to test the stability of the investment model. The results show that, there is a long run relationship among savings, trade and investment. The results from ECM show that speed of adjustment in investment function is moderate in Bangladesh. The plot of CUSUM indicates the instability of the model. The results do not support the Feldstein-Horioka (1980) hypothesis meaning that the capital account of Bangladesh is not convertible.