When considering a regional context, most of the adjustment mechanisms at work in open economy models-such as exchange rate movements, or changes in interest on public debt-are simply not present, as they are controlled by "external” authorities. However, few contributions, if any, have modeled two regions in the same country, and our paper aims at filling this gap. Starting from the seminal works of Wynne Godley (1999 Godley and Lavoie 2005, 2007a, 2007b), the literature adopting stock-flow consistent (SFC) models for two or more countries has been flourishing, showing that consistently taking into account real and financial markets of two open economies will generate different results with respect to more traditional open economy models. Since the omitted variable is known, we call it “pseudo bias.” Given that this (pseudo) bias is known to be negative and less than one in absolute terms, it should come as no surprise that the Feldstein-Horioka regression yields a coefficient between zero and one.
This implies that the estimate of the coefficient of the saving rate in the Feldstein-Horioka regression can be thought of as a biased estimate of the same coefficient in the accounting identity, where it has a value of one. The reason is that by adding the capital account to their regression, one gets the accounting identity that relates the capital account, domestic investment, and domestic saving. Second, and complementary to the first point, we show that the Feldstein-Horioka regression is not a model in the econometric sense, i.e., an equation with a proper error term (a random variable).
Working papers series#
First, we show that the investment and saving series typically used in empirical exercises to test the Feldstein-Horioka thesis are not appropriate for testing capital mobility. This paper argues that the 40-year-old Feldstein-Horioka “puzzle” (i.e., that in a regression of the domestic investment rate on the domestic saving rate, the estimated coefficient is significantly larger than what would be expected in a world characterized by high capital mobility) should have never been labeled as such. Further, the study proposes an assessment of the child’s mental health problems by the Strengths and Difficulties Questionnaire (SDQ) as a potential mechanism through which the child’s achievement at school affects child labor. The results provide robust evidence about the linkage between school performance and child labor in the West Bank. Our analyses are subject to different specifications, including two-stage least squares (2SLS) to account for potential endogeneity. Our findings varied among children according to their gender, age, and parental academic background. The results show that increasing a child’s academic achievement is significantly associated with decreasing the probability that a child works for money in the following period. The study utilizes survey data collected from Palestinian children in West Bank schools who are in the primary grades (5th–9th). The current study aims to investigate the impact of academic achievement on child labor.
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