On Exogeneity of Savings in Feldstein-Horioka Equation: The Case of Pakistan

Abstract

The study attempts to estimate Feldstein-Horioka (hereafter, FH) equation taking into account the data driven structural breaks and testing exogeneity of savings in estimated FH-equation in case of Pakistan. Primary findings are: a) to avoid spurious relation using appropriate methods, the elasticity of saving highlights the fact of high capital mobility in Pakistan during the stipulated period (1960-2020); b) we found no evidence of cointegration between domestic savings and investment; c) the estimated FH-equation reveals that domestic savings is weakly exogenous (hereafter, WeExt); d) domestic savings cause investment in Granger sense and hence confirm that it is strongly exogenous (hereafter, StExt); e) super exogeneity (hereafter, SupExt) of savings holds which reflects that the conventional Lucas critique is not validate in Pakistan. Lastly, several post estimation diagnostic tests are well documented.